McDonald's in Hong Kong

Analyzing McDonald's Franchise strategies in Hong Kong

Introduction

The research report analyses the various franchise strategies adopted by McDonalds in Hong Kong. The report analyzes the hospitality industry and the positioning of McDonalds is discussed with extensive research and analyses. The report is concluded by discussing the various strategies and franchise network of McDonalds that solved the existing problem.

Background

McDonald's was started as a drive-in restaurant by two brothers, Richard and Maurice McDonald in California, US in the year 1937, the business, which was generating $200,000 per annum in the 1940s, got a further boost with the emergence of a revolutionary concept called 'self-service. McDonalds suffered from supply chain management problems in managing its franchise network and its sales were reducing and around the world, approximately 85% of McDonald's restaurants were owned and operated by independent franchisees yet, McDonald's was able to run the show seamlessly by outsourcing nine different ingredients used in making a burger from over 35 suppliers spread all over India through a massive value chain. The franchising strategy problem arouse between 1992 and 1996, when McDonald's opened its first outlet in China, it worked frenetically to put the perfect supply chain in place and it trained the local farmers to produce lettuces or potatoes to specifications and worked with a vendor to get the perfect supply chain in place and explained to the suppliers precisely why only one particular size of peas was acceptable (if they were too large, they would pop out of the patty and get burnt). McDonalds managed its franchises all over the world and established strong control by establishing a cost reduction strategy in supply chain of all the franchise network of McDonalds.

Objectives

To analyze the various franchise strategies adopted by McDonalds in Hong Kong

To discuss the positioning of McDonalds in Hong Kong

To study the supply chain problem in franchise network of McDonalds in Hong Kong

Literature Review

There are various strategies framed by managers to attract and satisfy customers. Elizabeth in her study discusses some strategies like customer loyalty programs, free gifts, Special promotion packages, free holiday trips etc. Elizabeth in her study, Comparison of Loyalty Program Marketing Strategies explains “Loyalty programs play a major role in retaining customers and also gives an indication of the nature of the management. In this study, I have analyzed various marketing strategies especially loyalty programs adopted by various companies in the hospitality sector. The factors affecting the loyalty programs are elucidated. Usually loyalty programs are carried out as a result of company's aim and goals. In most cases, these programs are imposed upon the workers based on some practices being followed in the organization. These programs are targeted at the clients. Usually most of the companies develop these programs based on the market segmentation information they have. A separate market intelligence department takes care of campaigns based on the customer and the potential customer records. Various programs are planned to target the specific group and they are attracted towards the tourist spot eventually as a result of the marketing campaign. In most cases in many companies, the loyalty programs are targeted at the existing customers. The strategy behind these programs is ‘word of mouth' marketing which is the most important aspect in this sector. Once the company becomes a reliable brand, then tourists start flowing into them in huge numbers. These programs are used as a differentiation measure between the competitors. They also contribute to the overall success of the internal and external management related issues. The main purpose of these events is to get benefit out of the existing customers and this strategy works well in most cases”-(Elizabeth, 2004, 32)

Elizabeth in her research details more on loyalty programs leaving other strategies which are more effective.

The following research is pertaining to Europe, As Cantor explains more on guest satisfaction and market segmentation strategies in his report. Cantor in his study gives a more detailed explanation of the strategies responsible for the guest satisfaction. Jim Cantor in his research report, Tourism in Europe explains that “Studies are made to reason out the possible strategies to attract visitors to a particular nation. What are the possible features in a tourist spot that attracts the visitors to a place? I proceed with stating broadly that there are two major strategies responsible for guest satisfaction in a tourist sport. One of the strategies is related to attitudes toward traveling and the other strategy is related to the attractions in destinations. The overall attractiveness and the pleasant memories of tourists are the main factors. A destination's competitiveness can be determined through studying the successes and failures of the destination under study. My study is aimed at identifying various strategies that influence tourism and attract visitors to a hotel.” (Jim Cantor, 2008, 32)

As per this study by cantor, there are various factors like Physiography, climate, culture, history, Market ties, mix of activities, special events, entertainment, and superstructures; the Supporting Factors & Resources which includes the infrastructure, accessibility, facilitating resources, hospitality and enterprise; and Destination Management which enhanced and capitalized the core resources and the supporting factors. Destination management includes activities of destination management organizations (DMO), marketing management, destination policy, planning and development, human resource development and environmental management, location, interdependencies, safety/security, awareness/image/brand and cost/value etc. Generally, the factors are broadly classified into Macro economic, Microeconomic, Individual attitude, Consumer behavior, Transportation and Technology.

The drawbacks of this study include there are no inter relations made between the factors and the study doesn't consider the changing demographics as a factor. A lot of research has to be made in identifying the factors that are responsible for the guest satisfaction strategy.

Findings

McDonalds was experiencing a serious problem of managing its franchises in Hong Kong. Strategies were developed to solve the problem. It was found that the supply chain network in the franchises of McDonalds at Hong Kong was having a lot of intermediaries and the profit was shared to a great extent by this supply chain network. McDonalds understood the need for reducing its supply chain network and developed strategies to address the issue. The study found the franchising network which had problems and framed a model to address this franchise network. The study also finds the new franchising network that was developed as a result of various strategies adopted by McDonalds.

Analysis

The research methodology involves studying the various franchise strategies adopted by McDonalds in Hong Kong. The research is descriptive in nature and attempts to explain the strategies adopted by McDonalds to capture market share in Hong Kong. The study researches the strategies in detail. In the research, secondary data like McDonalds annual reports are used to arrive at the positioning of McDonalds using management tools like porters five force analysis.

McDonalds Franchising Strategy

Broadly, the strategies can be classified into three major types: Cost leadership, Differentiation and Focus. In Hospitality industry, Cost leadership strategy is not considered to a great extent because it is a luxurious sector. The main focus of the hospitality sector is to adopt the differentiation strategy and technology focus to achieve competitive advantage. A lot of innovative practices are introduced and customer service and value added service play a major role in the hospitality industry. Some of the strategies used by hospitality enterprises to achieve competitive advantage include Strategic Planning, Market Research. Business Planning, Retail Growth Strategy, Meal Plan Strategy, Sourcing and Procurement Strategy, Concept Development, Health and Well-Being Strategy, Information Systems Strategy, Food Facilities Planning and Design. McDonalds had adopted a cost leadership strategy here.

On reading through the news section at McDonalds, Supply chain is the major aspect to be considered in strategy formulation at McDonalds. McDonalds franchise network was very long involving many intermediaries. The cost of the intermediaries was huge and the product when it reaches the McDonalds Franchise store costs double the amount when it was procured from the farmer as the intermediaries take their commissions. McDonalds cost of production increased and hence they raised the price of the products when they entered in China and Hong Kong and their products were highly priced in the initial stages of operations in China and Hong Kong. McDonalds suffered huge losses in the initial stages as their products did not have much demand due to the high price. McDonalds understood the problem and wanted to cut down the prices and this could be done by reducing the cost of production by reducing the franchise network. McDonalds devised differentiation and cost leadership strategies to reduce the franchise network. The changes that had occurred can be pictorially depicted as follows:

McDonalds problematic Franchise network

Source: Primary

Cost Leadership Strategy

McDonalds simplified Franchise network

Source: Primary

McDonalds has used the cost leadership strategy to reduce the redundancies in the franchise network. The franchise network was completely redesigned as above and McDonalds strategically positioned itself as a premium store and took advantage of the location. McDonalds established its franchises in mega malls and super markets and had a good control over these franchises with a simplified network reducing the cost drastically. McDonalds adopted this strategy to gain competitive advantage and to capture the market share in Hong Kong. This strategy of reducing the channels in the franchise network and spending that money to establish franchise stores in leading mega malls, super markets and shopping malls clearly indicate that McDonalds is targeting the youth and students as their main customers.

Differentiation Strategy:

Labor force

Labor force is one of the key success factors to attain Competitive advantage. The strategy of differentiation can be attained through labor force. The skill, knowledge and the culture of the organization make it unique from the rest. This aspect is hard to copy or imitate. Hoteliers have started understanding the importance of labor in attaining competitive advantage and are spending huge amounts of money in recruiting and retaining skilled labor.

Technology

McDonalds has leveraged technology to its franchising network and has revolutionized the network using internet kiosks. This eliminates the intermediaries completely and McDonalds has used technology to differentiate itself as follows:

Technology driven Franchise Network

Source:

Primary

Both discounters and supermarkets survival will be very hard due to the entry of huge mega malls and Branded companies into the retailing sector. The grocery industry will have limited intermediaries with technology driven growth.

The Farmer could directly sell his finished goods to the branded companies like McDonalds, Wall Mart etc. through internet kiosks eliminating the intermediaries including the discounters. More the inventory will be very low in the warehouse leading to quality improvement in the products.

Conclusion

The report discussed the various franchise strategies adopted by McDonalds in Hong Kong. McDonalds current positioning is clearly explained after extensive analysis. Various strategies adopted by McDonalds like cost leadership and differentiation strategies are discussed in detail and franchise networks are framed for each strategy indicating their implications of McDonald's success in Hong Kong after the initial failure. The report discussed the various problems related to franchise network and solution provided by McDonalds in solving these problems are discussed and concluded.

References

§ Cooper, Donald and Schindler, Pamela, Business Research Methods, Tata McGraw-Hill Edition, 2003. Pg. 32, Pg. 179, Pg 184-187, Pg 190-193, Pg 221-231.

§ Charles W.L.Hill, Gareth R.Jones, STRATEGIC MANAGEMENT THEORY, Houghton Mufflin publications

§ Elizabeth, Comparison of Loyalty Program Marketing Strategies Used by Holiday Inn and Novotel, February 2004

§ Harvey M. (2000) Innovation and competition in UK supermarkets, Supply Chain Management, Vol 5 No 1, pp15-21 (via Emerald)

§ Flavian C, Haberberg A, Polo Y. (2002) Food Retailing Strategies in the European Union. A comparative analysis in the UK and Spain, Journal of Retailing and Consumer Services, 9, pp. 125-138 (via Science Direct)

§ J Barney, “Firm Resources and Sustained Competitive Advantage”, 1991

§ Jim Cantor, Tourism in Europe, European Journal of Tourism, February 14, 2008

§ Kishore Kumar Morya, Develop Supply Chain Competencies: think and act differently, AIMA publication, September 2007

§ Kothari.C.R. Research Methodology, Wishwa Prakashan, New Delhi, Reprint 2002, Page number: 39, 40,117-119, 277-279,300,301

§ Kotler, Philip. Marketing Management, Eastern Economy Edition, Prentice-Hall India Ninth Edition, 2004.

§ M E Porter, “Competitive Advantage”, Oxford Publications, 1985

§ McDonalds Supply chain Case studies available at: http://www.icmrindia.org/casestudies/icmr_case_studies.htm

§ http://www.itcportal.com/ruraldevp_philosophy/echoupal.htm

§ www.walmart.com

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