Pro jec t on I n te rna t i ona l Marke t ing St ra tegy o f a Company Company Selected: McDonald Strategy for Entering: Eastern Europe (Estonia)
Submitted by Rehan Yousaf Department of Administrative Sciences Quaid-i-Azam University, Islamabad
MC Donald’s entry in Eastern Europe (Estonia) McDonald Company Background
ay Kroc, at 52 years old, invested his entire life savings to become the exclusive
distributor of a milk shake maker called the Multimixer. Hearing about the McDonald's hamburger stand in California owned by Dick & Mac McDonald running eight Multimixers at a time, he packed up his car and headed West. It was 1954. Ray Kroc had never seen so many people served so quickly. He pitched the idea of opening up several restaurants to the McDonald brothers, convinced that he could sell eight of his Multimixers to each and every one. "Who could we get to open them for us?" Dick McDonald said. Well," Kroc answered, "what about me?" Ray Kroc opened the Des Plaines, Illinois restaurant in 1955 and never looked back. In 1965 McDonald's went public with the company's first offering on the stock exchange. In 1967, the first McDonald's restaurant outside the United States opened in Richmond, British Columbia. In 1968, the Big Mac® sandwich was introduced, followed by the Egg McMuffin® breakfast sandwich in 1973. Milestones and accomplishments have followed ever since. Today, there are tens of thousands of McDonald's restaurants serving millions of people daily around the world. The incredible growth and success of McDonald's can be summed up with the first thought that went through Ray Kroc's mind when he first saw McDonald's: "This will go anyplace."
McDonalds celebrated its 53rd anniversary in April 15, 2008 and remained true to the statement "As far as I can tell, the only place you can't get a Big Mac is in outer space." The company operates as a global business through franchising. In 2004, the company reported to have established 30,000 local restaurants located in 115 countries across five continents. It is the biggest fast food retailer conquering markets worldwide. In almost every country, there is a McDonalds restaurant and in a single state or region, there are several branches. The company has spread so widely that the term “mcdonaldization”, was coined to describe the organization and culture of the company. The term has evolved to refer to the general business strategy of expansion.
Vision McDonald’s vision is to be Estonia's "best" quick service restaurant, experience supported by a set of core values and guiding principles.
Values and Principles of McDonald’s The core values McDonald live by •
Dedication to provide customers unparalleled levels of Quality, Service, Cleanliness and Value.
Commitment with the people, because it knows that a diverse team of well-trained individuals, working together, is the key to its continued success.
To approach all aspects of business with honesty and integrity.
It backs to the system that provides success.
Celebrating the achievements, yet we always strive to achieve new heights.
The principles that guide McDonald •
Commitment to exceed the customers' expectations in every restaurant every time.
McDonald believes its success is dependent upon our three-legged stool - Corporate, Franchisee Partners, and Supplier Partners.
McDonald is committed to franchising, maintaining a highly collaborative relationship with its franchisees and making franchising decisions based on what's best for its customers.
McDonald’s mode of entry in foreign Market and Expansion Strategy McDonalds enter in the foreign market through direct selling its product in its private outlets. It may be called as a specialty product producer. Product being produced, sold, & promoted by its own self. This mode of entry requires McDonalds to have deep study of the market in which it is planning to go. McDonalds expands its operations through franchising. Franchising is a hybrid manner of expanding and organizing the business by establishing a relationship of agency with the franchisees. Franchising involves the convergence of a parent company and several small businesses. The parent company sells to the smaller businesses the right to distribute its products or use its trade name and processes. A contract governs the agency relationship established between the parent company and the franchisees. The franchise contract defines the conditions of the agency and the duration of the relationship.
Company Management and Marketing Strategies Organizational culture is the concept that guides the operations of McDonalds. McDonalds operates according to four values: quality, service, convenience and value. Organizational culture is part of the knowledge and information transmitted by McDonalds to the franchisees in other countries. Part of organizational culture is the delivery of uniform quality of food and service wherever the branch is located. The good reputation of the company and the expectation of an excellent service no matter which branch people eat is a marketing strategy of McDonalds. McDonalds sets a standard applicable to all its branches worldwide. However, the company also gives leeway for innovation by allowing the branches to integrate culture into food and service increasing market share.
Eastern European Market Background Eastern Europe constitutes an emerging market for most businesses. The collapse of socialism in the region in 1989 facilitated the move of countries in the region to prepare for participation in the capitalist market. In 1999, most Eastern European countries were working to meet the requirements for membership in the European Community. In 2004, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia became members of the European Union. Membership of a number of Eastern European states in the EU prompted the flow of foreign investments into the region, increasing household income, increasing consumption and spending, because of cheaper labor compared to wages in Western Europe. There was a general trend towards the improvement of the standard of living of citizens of Eastern European countries. However, in the last two years, most Eastern European countries experienced slowed growth due to the increase in the wages of workers that discouraged investments. Nonetheless, wages are still more competitive in Eastern Europe compared to other regions in Europe. Most Eastern European countries are still in the process of completing their transformation from a controlled to a capitalist economy. Full transition and the stability of the political and economic institutions are expected to boost economic development in these countries.
Business expansion into Eastern Europe offers potential profit and minimization of cost on labor and raw materials. Expansion into Eastern Europe offers mutual benefit to the country and to the foreign business by providing investments and technology to the country and costeffective operations and profit to foreign business firms.
Attractiveness of Eastern Europe as New Market for McDonalds Assessing the potential of a new market for expansion requires the consideration of several factors providing a comprehensive background of the environment that the expanding business firm expect to enter into.
Gross Domestic Product
is the common measure used to determine the economic condition of a country. GDP has several components, which are consumption, investment, government consumption, exports and imports. However, the most significant indicator of the movement of the market is consumption. In terms of consumption, there is a high volatility of consumption relative to emerging countries and industrial states. Although UK holds a high consumption volatility of 1.15 among the G7 countries, the consumption volatility rate in Lithuania and Poland is 1.05, in Russia it is 1.03 and in Slovenia it is 0.71. Consumption volatility is attributed to either the rapid income growth resulting to a changing consumer behavior, or liquidity constraints especially in economies with an underdeveloped financial system, or consumers are not assured of a constant source of income that increases the tendency to save instead of increasing consumption. The stabilization of the political and economic institutions of Eastern European states provides an environment conducive to economic activities and foreign investments. In choosing a country in Eastern Europe to invest in, the state with the stable political and financial institutions should be chosen so that consumption is constantly increasing and the potential for profitability is higher. There is also lesser risk in entering a stable economy. Apart from GDP, the characteristics of the labor market also influence the viability of entering a new market. The general trend in employment in European countries also indicates high volatility particularly in Bulgaria with a high absolute volatility relative to Czech Republic and Slovenia with lower volatility. The nature of employment in most Eastern European countries is spread similarly across industries similar to G7 members with the exception of Estonia and Czech Republic with exclusive industrial employment. Consequently, there is also a general trend of wage volatility especially in Russia and Hungary. However, there is an observed persistence in real wages in most countries except Estonia. There is no common trend in productivity. The volatility of productivity is low in Hungary, Czech Republic, Poland and Slovakia and high in Estonia, Bulgaria and Romania.
Employment and wage volatility
are important factors in deciding to enter a new market because minimal employment and wage volatility translates to regular income for households influencing the stability of consumption resulting to sales and revenue for business firms. The economic condition of the state affects the financial condition of consumers and their ability to purchase the goods and services offered by entering business firms.
Although there is a general trend for consumption, employment and wage volatility among European countries, introducing McDonalds into the region is viable for following reasons:
McDonalds will develop a market by providing technological, management and marketing expertise to local entrepreneurs enabling them to establish a known restaurant in different areas that creates jobs translating into income to households due to the hiring of local employees and the purchasing of raw materials from the local farmers and businesses.
McDonalds incurs less risk, relative to other industries, because food and drinks is a necessity and if the company can offer an affordable, alternative source of food then it can gain a significant portion of the market.
McDonalds expects continues growth in the long run, although fluctuating, in Eastern European countries due to the development and opening of investment opportunities drawing the continuing flow of foreign investments positively affecting employment and income.
Fourth, there are relatively less multinational restaurants in Eastern Europe giving the establishment of McDonalds in the region a competitive edge in terms of consumer share and market leadership.
Fifth, the consumption culture in Eastern Europe is changing due to its involvement in international trade introducing the Eastern Europeans to the fast food culture. The entry of McDonalds in Eastern Europe is timely.
Estonian Market Country Background: Estonia is a democratic parliamentary republic and is divided into fifteen counties. The capital and largest city is Tallinn. With a population of only 1.4 million, it is one of the least-populous members of the European Union. Estonia was a member of the League of Nations from 22 September 1921, has been a member of the United Nations since 17 September 1991, of the European Union since 1 May 2004 and of NATO since 29 March 2004. Estonia has also signed the Kyoto protocol
Economy As a member of the European Union, Estonia's economy is rated as high income by the World Bank. The Estonian economy Estonian economic miracle has often been described as the Baltic Tiger. Trade focused on the local market and the West, particularly Germany and the United Kingdom. Only 3% of all commerce was with the USSR. Before the Second World War Estonia was mainly an agriculture country whose products such as butter, milk and cheese was widely known on the western European markets.
GDP growth in Estonia
Political Conditions: Estonia exudes political and economic stability relative to other Eastern European countries. In the spring of 2003, the country held its parliamentary elections resulting to the victory of the conservative coalition. Prime Minister Parts’ direction is towards the continuation of reform policies. Estonia became a member of the European Union in May 2004. The country is experiencing robust economic growth attributed to investments and private consumption. The expected average growth in succeeding years is 5 to 6 percent. The government also applies sound fiscal policy resulting to substantial budget surpluses. The country also has a stable banking sector led by Scandinavian banks. Estonian economy is dominated by the service sector with a 65 percent GDP share, followed by transport and communications with 16 percent and then by the distributive trades with 14 percent.
Labor and Wages Estonia has a labor force that reached high levels of education. Wages are low but this is steadily increasing due to increasing economic activities demanding more labor. Workforce is also capable of speaking English, German and Russian apart from the official language of Estonian. Based on 2003 estimates, the national average per hour cost of labor is 3.87 euro in the service and industry sectors. This is lower when compared to EU average per hour rate of 19.65 euro. On the average, the monthly gross income is 441 euro when compared 2,396 euro average monthly wage in EU.
Ethnic and cultural diversity Tolerance and democracy are illustrated by the Law on the Cultural Autonomy for National Minorities, passed already in 1925, which was not only the first in Europe at the time but also very progressive. Prior to World War II, Estonia was a relatively homogeneous society – ethnic Estonians constituted 88% of the population, with national minorities constituting the remaining 12%. The largest minority groups in 1934 were Russians, Germans, Swedes, Latvians, Jews, Poles, Finns and Ingrians. Cultural autonomies could be granted to minorities numbering more than 3,000 people with longstanding ties to the Republic of Estonia. Prior to the Soviet occupation, the Germans and Jewish minorities managed to elect a cultural council
Business Plan for McDonalds Expansion into Estonia I. Obtaining Franchising Requests from Estonia McDonald is Entering in Estonia by giving franchising right to the local people. This will safe their cost of market research for the consumer taste and needs.
II. Entry into the Estonian Food & Beverage Industry Entry into the food and beverage industry in Estonia involves the establishment of links with local networks or partners in the supply chain. McDonalds assessed the ability of owners/operators to find a good location and establish valuable links with local suppliers for the building of the physical structure of the restaurant, food supplies and workforce sources. This is important because McDonalds applies strict standards in these aspects that should be followed if the company is to impart the company culture to the new owner/operator. Communication with the owners/operators is important in the transfer of the design, processes, technological abilities, management expertise and marketing strategies to the McDonalds franchisees. Prior to the opening of the restaurant, the physical structure should have been built, the crew trained, a manager designated and suppliers are contacted and arrangements are made.
III. Market Segmentation and Product Positioning There is little market segmentation because McDonalds target households in general. Although at the beginning, there may be an initial segmentation with the middle and upper income classes composing majority of its market, the company expects to reach out to lower income brackets as Estonia’s economy continuous to grow, employment and income increases resulting to higher ability to pay together with the change in food culture as more people are exposed to American food and the fast food culture. McDonalds will introduce the restaurant as a viable alternative to local restaurants because it offers a different culinary environment targeting the Estonian family culture and to local food since McDonalds offers American food. However, McDonalds will also encourage the operators/owners to design innovative ways of integrating Estonian values and culture into the food, service delivery, marketing and management of the restaurants to attract customers.
IV. Competition McDonalds does not have a major competitor in Estonia because of the relatively less number of foreign, non-European restaurants in the country. Competition comes from established local restaurants. McDonalds carries the competitive advantage of management and marketing expertise coupled with knowledge of the local market through the owners/operators. However, a possible competitive weakness is the views of the Estonians towards the United States since McDonalds is an American business and towards the company as an international business firm. Negative perceptions should be addressed.
V. Marketing 1. Product McDonald’s products are standard in all franchises. However, the company adjusts to culinary differences in various cultures. In the case of India, McDonalds offered vegetarian burgers to practicing Buddhists. Asian countries preferring spicy taste saw the introduction of spicy burgers, chicken and seasoning. This provides options for customers to purchase food with either the American taste or the local taste. McDonalds achieves balance by maintaining standardization in products but adjusting to the local taste.
2. Price McDonalds prices differ in difference franchises since product price depends upon the expenses and costs in the locality. However, McDonalds determines price by ensuring the profitability of the restaurant while considering affordability to customers. Owners/operators should be trained to be cost-effective in their expenditures. Balance between profitability and affordability is achieved through the company’s pricing policy based on actual expenses and the receiving value for value given. This means that people are willing to pay a certain price when the company delivers and equivalent quality food and service.
3. Placing\Distribution McDonalds distribution channels in exclusive to its franchise restaurants. The way of increasing its channels of distribution is by obtaining several franchise requests in Estonia. Population, income and industrialization trends influence the decision to increase franchises.
4. Promotion McDonalds promotions are made internationally by the mother company and locally by the owners/operators through advertisements espousing company values and promotions such as taste-tests, discounting and frequency cards. McDonald's Advertising McDonald's original advertising symbol was a winking little fellow named "Speedee", designed to promote McDonald's fast service. In the 50s and early 60s, McDonald's drive-in restaurants were easily identified by their red and white tile buildings, which were capped with a slanted roof and framed on either end by a single golden, neon arch. Restaurants began to use the advertising theme, "Look for the Golden Arches" and in 1961, the "Speedee" symbol was replaced by a new logo - an "M" slashed with a line, symbolizing the neon arches and restaurant roofline. The arches, updated over the years, remain the advertising symbol for the company and are now one of the most recognized icons in the world.
VI. Operations Customer Oriented Product and service delivery of McDonalds is customer centered. This means that McDonalds’ primary concern is the satisfaction of its customers. This is ensured by applying a strict standard of food and service quality.
Under direct Supervision of Mother Company Periodically, representatives from the mother company visit certain branches in order to ensure the maintenance of quality standards, to discover problems and issues, and to provide updates on operation, management and marketing techniques. The quality standard is integrated in the entire supply chain process, starting with the products obtained from suppliers, the process of transforming raw materials into consumable products, packaging the food products, taking the orders of customers, and delivering the food.
Quality focused McDonalds employees play an important role in the delivery of quality product/service delivery. Employees are also responsible for providing customers service by asking the preferences of clients and listening to their requests and needs, and addressing these accordingly.
Customer’s Value McDonalds values its employees as much as it values its customers. The company applies the employment policy of providing sufficient training to its workforce. Prior to starting work, newly hired employees are given a rundown of the rules and regulations, company practices and the goals of the company. After this, the employees are introduced to the different components of the menu, process of food preparation, food-packaging techniques, serving of food, handling the cash register, and establishing rapport with customers. New employees are given practical exercises for experience.
Conclusion From its humble beginnings in Illinois, McDonald’s has become one of the prevailing brand names in the world that has become synonymous to the fast-food concept in the food industry. McDonalds has a strong marketing strategy, being supervised by the mother company, no matter at which part of the world the outlet is. The marketing strategies of McDonald’s guarantee lucrative proceeds for the company. It is said that McDonalds focuses to a specific kind of consumers with particular kinds of personalities. (Shank and Langmeyer 1994, 162) Other articles have pointed out that McDonald’s has given the market with an alternative dining experience. Debres (2005, 115) noted that McDonald’s has launched a sensibly priced set of meals that gives an unfailing level of quality for the public. As well, those who are under thirtyfive years of age are deemed as the most frequent consumer’s of McDonald’s stores.