Table of Contents
- Activities of the Company
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- Price Elasticity of Demand for the Products McDonald’s Sells
- Cost of Production for McDonald’s
- McDonald’s Primary Competitive Advantages
- Entry Barriers for the Companies in the Fast Food Industry
- Possibility of Existing Substitutes for McDonald’s
- Market Share for Companies in the Fast Food Industry
- McDonald’s Market Structure
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The company which is going to be viewed in this research paper is McDonald’s. This company is one of the largest restaurant chains in the world that provides people with cheap and hot fast meals. McDonald’s restaurants are widespread all over the globe. Franchisees, affiliates and the corporation itself operate each McDonald’s restaurant. The rent, the sales in restaurants, royalties and fees paid by franchisees provide the corporations’ revenues.
High standards of performance, competitive strategies, superior products and the high integrity of people bring the success to McDonald’s. The company keeps on expanding and introducing new drinks in the market. Franchisees own and operate a bigger part of McDonald’s restaurant businesses all over the world.
McDonald’s believes that their success depends on the value and quality of their products. It is considered to provide a safe, salutary economically effective and favorable environment for consumers and fair revenue to their investors while keeping up the highest standards of consistency.
Activities of the Company
McDonald’s is one of the largest restaurant chains in the world. It provides people with cheap and hot fast meals. The main goal of McDonald’s is to “be our customers’ favorite place and the way to eat and improve our operations and enhance our customers’ experience” (McDonald’s Website). McDonald’s administrators must abide the four functions of management in order to achieve the goals. These functions are organizing, planning, controlling and leading. Nowadays, McDonald’s keeps its popularity stable and serves to millions of people every day. But it was not always like that.
In 1940, McDonald’s could hardly be called a fast food restaurant. It was only a hotdog stand which two brothers, Dick and Mac McDonald, owned in San Bernardino, in California. As the place gained popularity and profits, brothers then established a restaurant in which they served around twenty five items that were mostly barbecued. So the food in the first McDonald’s actually was not so unhealthy. However, the range of items was decreased, once the brothers reopened their first restaurant in 1948. French fries, hamburgers and milkshakes were the only things they served.
McDonald’s gradually became famous. The brothers began franchising their restaurants in 1953; Neil Fox took the first franchise and opened McDonald’s in Fresno, California. McDonald’s Corporation as this chain of fast food restaurants now belongs to Ray Kroc who bought the business rights from the McDonald’s brothers in 1961.
As Ray Kroc was a great entrepreneur, fast food restaurants spread out across the USA rapidly. The first McDonald’s outside the USA appeared in 1967. In later years, McDonald’s extended to Europe and Asia. Nowadays, fast food restaurant chain is spread across the world in most major cities of the globe. And it is quite successful due to being economic and user friendly.
McDonald’s offers a vast range of products, but the most popular and best-seller items are still hamburgers and French fries. Today, the variety of meals includes several kinds of burgers (Big Mac, Grilled Onion Cheddar Burger) and sandwiches (Premium Grilled Chicken Classic Sandwich, Fillet-O-Fish), chicken (Chicken McNuggets) and fish (Fish McBites) meals, snack wraps (Mac Snack Wrap, Angus Mushroom & Swiss Snack Wrap), breakfasts (Fruit & Maple Oatmeal, Egg McMuffin, Hotcakes), salads (Premium Bacon Ranch Salad, Premium Caesar Salad), snacks and sides (French Fries, Apple slices, Fruit & Walnuts), a big amount of iced and hot beverages (Premium Roast Coffee, McCafe Hot Chocolate, McCafe Iced Mocha, McCafe Shakes & Smoothies, juices, sodas), desserts & shakes, including several kinds of ice cream, pies, muffins and milkshakes. Unfortunately, most meals are with a great content of Trans fats (McDonalds Website).
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All of these items are quite affordable. It is convenient to buy from McDonald’s and eat while walking. The restaurant chain is designed for people who do not have enough time to have a proper meal.
Supply and Demand Conditions that Impacted McDonald’s in Recent Years
Supply conditions have influenced on McDonald’s greatly. Firstly, the package of some meals has been changed to more convenient and brighter, in order to attract more customers. Another supply condition is quantities in which all the items are produced. As millions of people visit McDonald’s every day, it goes without saying that the production volume of meals is huge. However, the quantity within the production of items which are the best sellers is not the only thing that matters. Fast food contains a great amount of fat and simple carbohydrates. McDonald’s has started to provide the healthier food that includes salads, fruit and fruit beverages like smoothies. Expanding the variety of items is also a marketing move in order not to lose its customers. They try to substitute the fast food with healthier meals. This actually has resulted in increasing of costs; therefore, prices have risen up as well.
The people’s demand changes all the time. It is to the benefits of the company to satisfy them. And McDonalds seems to have some problems with that. In the end of the 1990s, the decrease of demand in McDonald’s fast food restaurants was assumed to appear. However, it is just a presumption. No matter how demand conditions have changed, the very demand has not decreased. On the contrary, it is quite stable and brings good revenue to the McDonald’s fast food restaurants all over the world. Meeting the customers’ demand, McDonald’s has opened a restaurant with vegetarian meals on the menu in India.
Price Elasticity of Demand for the Products McDonald’s Sells
Price elasticity of demand is a measure of responsiveness of the quantity of demanded goods to a change in their price. Price elasticity depends on some factors that affect the goods of the company. The first factor is substitutability. It implies that goods do or do not have substitutes. Considering the products of McDonald’s, they can be substituted with home-made lunch food or with that of other fast food restaurants or cafes. It shows that price elasticity of demand is quite high. Besides, in the recent years McDonald’s has raised its prices, and the demand has gone down a little bit; and price elasticity increased.
The concept of price elasticity of demand is defined as a proportionate change in quantity demanded as the ratio of proportionate change in price (“Elasticity of demand for McDonald’s meals,” n.d.). Considering McDonald’s, the objective audience is young people and those who belong to the working class. The price elasticity of demand for McDonald’s meals is rather elastic. Elasticity of demand means that raised price of the product influences the demand or consumption of that product. The buyers of McDonald’s meals are highly sensitive to a change in the price of its products due to the fact that McDonald’s meals are magnificence for the people who belong to a low working class. However, it is inelastic for a consumer group who has a high income because it has a need for them. When the price of McDonald’s meal increases due to any factor, the working group loses the ability to afford it. They turn to other products that would satisfy their meal needs. On the other hand, McDonald’s is ordered meals for those who are able to afford them, so an increase or a decrease in price will not make a difference for them.
The elasticity of demand changes along a demand curve. It is not constant. However, the demand curve is slope which means that the price and the demand change slowly. Usually they change not much significantly. McDonald’s should lower the price for its products in order to make the demand higher and increase the competition in the fast food industry.
Cost of Production for McDonald’s
Costs are defined as those expenses that are faced in an affair in the process of providing consumers with goods and services. There are some reasons why costing is a relevant part of the production. First of all, being aware of how much it costs to produce goods or to realize an activity, it is possible to price the goods or activity. It also becomes possible to see how much of the total cost of an organization, a production line, or a process can be attributed to the particular goods or activities. In addition, it makes it possible identify costs that are too high and can be cut out. And, finally, it is possible to make comparisons between the costs of different activities (“Calculating costs of production,” n.d.).
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There are two principal costs that are born in production. The first ones are the direct costs which are the costs that can be connected with each item of turnout. For instance, in producing a burger, McDonald’s will bear the direct material costs that are included in each burger (a bun, meat, salad, and etc.); and the direct labor costs (i.e. the number of labor hours per average wage). The second ones are the indirect costs which represent the overheads that are born in making the burgers, e.g., the management salaries and rent. These indirect costs should be allocated in a reasonable way to the products produced.
The higher costs are the less profit the company gets. In such a case, McDonald’s will have to raise prices for products which will result in inelasticity of demand. Customers will turn to competitors of McDonald’s. As it is not advantageous for the company, it should lower its costs of production. Using some technology development, McDonald’s is able to lower not only costs of production, but its prices as well. This helps to improve and manage the company economically and effectively. Besides, it affects the profitability of McDonald’s by increasing the elasticity of demand.
McDonald’s Primary Competitive Advantages
One of the primary and most important advantages of McDonald’s is using a real estate to leverage financial resources. Back to the 1950s, when Ray Kroc has bought business rights for McDonald’s from brothers that founded it. He has established restaurants across the country, but they were hardly profitable. Kroc’s partner came up with an idea to lease or buy potential store sites and then sublease them to franchisees. Embracing this idea, Kroc set up a subsidiary, the Franchise Realty Corporation to execute the new strategy. In the years thereafter, he has bought lands, as they were quite cheap and plentiful. And in a short period of time, the real estate operation became a high-margin contributor to McDonald’s bottom line (“Ray Kroc, McDonald’s and the Fast-Food Industry”, 1996). No other company could compete with such strong financial grounds.
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The advantage that distinguishes McDonald’s from its competitors is its superb consistency. It means that the products are made repeatedly in the same manner without any regard to a geographical location and the time of day. Hamburgers are those items that are required to be absolutely similar to one another. McDonald’s ensures the consistent quality of production with the careful design of each item, the way it is prepared and raw-food components that were used. Such uniformity in production is a major goal of McDonald’s. It concerns not only the food production, but also customer service and workers’ outfits. All the employees must wear the similar uniforms and serve customers in an impeccably polite and friendly way. This competitive advantage brings some benefits to the company. The consistent quality provides cost standards for other outlets within the company, enables cost efficiencies, detects and evaluates the areas of weaknesses, and decreases the customers’ uncertainty.
Unlike most other fast food restaurant chains, McDonald’s gradually creates the new items on the menu and improves or varies the existing ones. For instance, McDonald’s focuses on reducing the Trans fat and salt content of products trying not to change their taste. Also cooking oils used before have been substituted with the healthier ones. And this change has been quite successful. Besides, the meals and snacks which gained a big popularity and demand salads and other vegetarian meals appeared on the menu.
Entry Barriers for the Companies in the Fast Food Industry
The fast food industry is a multi-billion dollar global industry. Every year, it becomes even larger. Of course, McDonald’s Corporation as a leader takes almost half of all the fast food industry. Despite the fact that the new fast food restaurants keep popping up all the time, it is not so easy to start in this business. There are some entry barriers which represent institutional, government, technological or economic restrictions on the entry of participants into a market or industry. The four primary barriers to entry are the resource ownership, patents and copyrights, government restrictions and start-up costs. The barriers to entry are a key reason for the market control that enables it by limiting the number of competitors and, thus, the availability of close substitutes (“Barriers to Entry”, n.d.). The main entry barrier for the fast food industry is the start-up cost. It may range from $90,000 to $300,000 (“Getting into the takeaway and fast food industry”, n.d.). The government is considered to play an important role in the entry of the company into any industry. McDonald’s knows about the strong and severe rules which the government implements to ensure that food safety is being followed. Thus, McDonald’s always tries to meet the stringent food safety standards and only works with those suppliers who agree that this commitment is highly important. Nevertheless, the business in the fast food industry is considered to have low entry barriers. The lower they are the higher the competition is. That is why the market has a vast variety of fast food companies. Although the fast food industry is a difficult market to successful at, McDonald’s is still thriving.
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Possibility of Existing Substitutes for McDonald’s
As the fast food industry is quite large, there are some substitutes for McDonald’s within the industry that is the competing sellers. They provide similar products; and, therefore, customers have a choice where to eat. Also there are the products and services that perform the same function, but are being in different industries, e, g, grocery stores and fast casual. The main competitors for McDonald’s like Wendy’s and Burger King have derived the new strategies through offensive and defensive tactics in order to gain their customers and market share. For instance, in 1989, Wendy’s introduced the 99 % value menu as an offensive strategy to gain customers looking for a quality product at a value price. In response, McDonald’s and Burger King took a defensive approach and also implemented a value menu in their respective stores. Thus, they would not lose the market share and customers to Wendy’s. As the availability of such variety of substitutes limits the profitability of the whole fast food industry and McDonald’s in particular, McDonald’s differentiates its products and services by providing the dollar menus and new brands. It also responds to the collective industry providing healthier foods and lowering prices.
Mostly substitute products may involve food from restaurants, delivery foods or products bought from the local grocery store. The major problem with these substitutes is that they are easily obtainable to a buyer. The buyer inclines to view them comparing to the fast-food products quality. There is another issue that the fast-food industry faces. It is the accessibility of products that serve to the lifestyle of health-consciousness. Most of people consider fast-food restaurants as serving foods that are high in the content of Transfats and the unhealthy food. As a result, they are surely to look for a healthy alternative in some other places. In response to the product offerings, consumers also practice the widely ability of bargaining through their buying power. While fast-food products may not always be supposed to represent healthy and high-quality meals, fast-food restaurants to possess a big benefit over the companies selling substitutes through the price of their products and the fast as well as convenient service.
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Market Share for Companies in the Fast Food Industry
As one of the largest and oldest fast food restaurant chains, McDonald’s has the biggest market share in the industry. It was the expanding market share by establishing new restaurants all around the world and taking from every other major chain. Besides, McDonald’s there is a range of popular fast food chains which include Wendy’s, Burger King, Sonic Drive-In, Jack in the Box, Taco Bell, and Subway. The market share of McDonald’s Corporation was rising as it took the part of other chains shares. However, the world crisis strongly has affected the market share of McDonald’s in the fast food industry. To compare, in 2006, McDonald’s market share made up to 46 per cent of all the fast food industry; in 2011, it increased to 49.6 per cent. Nevertheless, nowadays it makes around only 13 per cent (Weisenthal, 2012; Manzella, 2012). New fast food restaurant chains that entered the industry suppressed McDonald’s and its main competitors.
Nowadays, the four largest companies including McDonald’s combine for less than half of the market share leaving a remainder for a lot of other small companies. The McDonald’s Corporation is supposed to be worried about its current position because the three big competitors hold the market shares that are almost as high as that of McDonald’s. The possibility that McDonald’s will soon lose its leadership in the fast food industry has the right to exist. Therefore, in order to stay ahead of the curve, the McDonald’s Corporation must turn its threats into opportunities.
McDonald’s Market Structure
McDonald’s belongs to the market structure of oligopoly. Oligopoly means that the very few companies dominate in the industry and have the ability to fix prices. And the McDonald’s Corporation represents one of the leading companies in the fast food industry both in the United States of America and internationally in the whole world. As this company has the biggest market share in the industry, it relies on the actions of other businesses. McDonald’s has to be able to foresee the nature of other entities in order not to go down. In oligopoly markets, there is the intensity between self-interest and cooperation. If all the companies cut down their output, the price becomes high, but then companies have a motive to expand output.
A quite large quantity of buyers frequently put producers in quite a beneficial situation, owing to the fact that there are fewer alternatives for buyers to choose from. The oligopoly market structure gives the producers a priority on the advantage of guaranteed revenue. This guaranteed revenue essentially goes up due to the shortcoming of alternate goods or services. Such a situation is rather beneficial to producers as it supplies them with a great chance to rise up the prices of their goods. In some occurrences, this may also work in an inverse way as in an effort to appeal more buyers; the producers will decrease the prices, which will eventually lead to a decreased general price level.
A market in oligopoly does not justify the presumption that both elements (either producers or buyers) have a perfect knowledge of the whole market. The producers are sure to have a superb knowledge of buyers, but the inverse is not true which means that buyers do not possess with the awareness of producers and a price setting. Because of such a situation, oligopoly affects the national economy in a strange and negative way. Unfortunately, such effect has essentially risen.
One of the prominent negative impacts of oligopoly is that it is a set form of the market system where producers prevent new entrepreneurs from entering into the market. According to Scholasticus (2010), there are some cases where producers will unite against the potential new entries in the market by controlling the price fixation and thereby creating an acute loss of revenue for the new producers. It means producers are inclined to share markets in some kind of oligopoly markets also. That often leads to a rapid increase of a general price level. Scholasticus (2010) also states that the phenomenon of the assured market and sales stagnates the development and research, which consequently leads to producers churning out sub standard goods.
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Recommendations for McDonald’s Further Development and Prediction of the Future of the Company
The fact that McDonald’s products are widely popular all over the world does not show that the demand on them will not change. McDonald’s should increase the line of its products. Then there will be a bigger variety of items which can be chosen. More desserts and more items like Pizza McPuff should be included in the menu. The service that McDonald’s provides must be improved all the time and be quicker. It is a main point of the fast food industry. McDonald’s should lower the supply chain cost in order to reduce costs. For attracting and retaining customers, McDonald’s should expand their Happy Meal choices. It also would be great if the company focuses on presents for all generations; that are for youth, kids, and especially the senior citizens. This is a completely new concept.
Optimizing the menu is not the only new goal that McDonald’s should implement in order to keep the growth of the company. Besides, the importance of optimizing the menu without kicking out popular such standards such as the “Big Mac”, it would be well if the corporation renovates its facilities and adds new technologies for modernizing the customers’ experience. For instance, it is necessary to make the service easier for managers and crew to serve the customer fast and accurately. The company accelerates the interior and exterior reimaging efforts around the world in order to enhance brand perceptions and drive higher sales and returns. One of the new goals of McDonald’s is an intention to add franchises and increase working hours at some of its locations. Thus, the quantity of people working for the McDonald’s Corporation will probably increase. In addition, McDonald’s will continue to concentrate on proving the affordable options; for example, testing cheap burgers in the selected markets.
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In this research paper, McDonald’s is viewed as a representative company of fast food industry. It is stated that the McDonald’s Corporation is the largest fast food restaurant chain in the world and leads in the market. It provides food that is affordable to people of medium and working classes. The variety of products McDonald’s offers is vast. However, the best seller items are still those which were in the very beginning, i.e. burgers, French fries and milkshakes.
It is indicated that McDonald’s as any other company has been through hard times that the demand on fast food has had its ups and downs. There have been some supply and demand conditions that have affected McDonald’s in the recent years. In order to keep customers interested McDonald’s has changed packages, increased the amounts and enlarged the diversity of products. In the recent years, the healthier food has entered the main menu including salads, fruit and fruit beverages. The demand and its price elasticity depend on customers’ preferences in food. Another factor that influences on McDonald’s profitability is the costs of production. However, as long as McDonald’s uses some technology development that helps to manage the company economically, costs of production are essentially lower.
It was ascertained that the most powerful competitive advantage of McDonald’s is a real estate which functions as a leverage of financial resources. This advantage, along with the superb consistency of products, makes McDonald’s a leading company in the fast food industry. Nevertheless, there are the competitors to McDonald’s. Such big companies as Wendy’s, Burger King, etc. provide the substitutes for McDonald’s. Despite that McDonald’s has got the biggest market share in the industry, other companies take almost as much as it does.
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It is noted that the McDonald’s Corporation should optimize the menu, provide some new technologies in restaurants and broaden the accessibility to products. McDonald’s is expected to grow as long as it provides the healthier food. So it may be said that the success and the future of McDonald’s depends on customers in a big extent. As long as people are willing to visit McDonald’s to have a quick meal or just spend some time with close friends in a cozy place, this fast food restaurant chain will thrive.
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