External and Internal Environments Term Paper

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External and Internal Environments

The purpose of this paper is to analyze the external and internal environment of McDonald's in the light of general environmental forces (social and demographical forces and economic forces), competitive environment (rivalry among existing competitors and the bargaining power of customers), internal strength and weaknesses, and external opportunities and threats. The paper also analyzes the company's core competencies, resources, capabilities, and value chain which have helped it in becoming the top market leader in the Global fast food industry.


McDonald's is the world's leading fast food restaurant chain with more than 34,000 outlets and fast food restaurants in 119 countries. It is an American multinational corporation headquartered in Oak Brook and business operations in all the six operating regions of the world. McDonald's serves more than 69 million customers every day -- a fact which speaks about the success of this large scale corporation in the Global fast food industry. It was founded in 1940 by Richard McDonald and Maurice McDonald as a small BBQ restaurant (McDonald's, 2013).

McDonald's experienced a rapid growth in the Global market when an American businessman, Ray Kroc purchased the whole chain from the owners and began expanding it through franchising. Today, more than 80% of the McDonald's restaurants and outlets are owned by private investors from the local and international markets. The mascot, Ronald McDonald was first introduced in 1967. It is now famous as a trademark of this large fast food chain in every corner of the world. McDonald's has an extensive product line which includes hamburgers (Big Mac), Quarter Pounder, Chicken McNuggets, chicken sandwiches, French fries, soft drinks, desserts, soups, coffee, milkshakes, and a large variety of other fast food and breakfast items (McDonald's, 2013).

Analysis of the Business Environment for McDonald's

A large number of forces are present in the external business environment of McDonald's. These forces include political and legal, social, demographical, and cultural, economic, technological, and environmental forces (Blythe & Megicks, 2010). The two of these general environmental forces or segments that can be ranked highest in their influence on McDonald's are social, cultural, and demographical forces and economic forces. This section analyzes the general impact of these forces on the overall fast food industry and more specifically on McDonald's.

i. Social, Cultural, and Demographical Forces:

The leading segment of the general business environment for the fast food industry is social, cultural, and demographical forces. These forces are related to the life styles, preferences, cultural and societal values, demographic and geographic segregation, behaviors, and attitudes of the general consumers in a country or region. These forces shape the way business organizations perform and compete in the marketplace (Jenny & Scammon, 2010). All the corporate, business, and functional level strategies are formulated by keeping in view these social and demographical forces (McDonald's, 2013). In the fast food industry, these forces play an important role in changing the preferences of consumers towards fast food products as well as their behavior towards different industry participants (Lamb, Hair, & McDaniel, 2012).

McDonald's takes the biggest impact from these forces on its product lines and marketing strategies. It has to offer fast food products according to the taste, preferences, and cultural values of its target consumers. For example, it cannot offer such products which are prohibited in some religions or disliked in some cultures. Similarly, it has to choose ingredients for its products very carefully in order to keep itself safe from criticism and boycotts (McDonald's, 2013). The taste and preferences of general consumers vary from region to region -- some consumers want pungent, spicy, and peppery foods; while others, being more health conscious demand low calorie food products. Therefore, McDonald's has to keep in mind these preferences while targeting different cultures and societies (Blythe & Megicks, 2010).

ii. Economic Forces:

Economic forces are the second most influential forces for McDonald's. They include economic conditions, inflation, income levels, exchange rate, industry growth, and other earning and spending patterns of the general consumers, business corporations, and governmental bodies (Lamb, Hair, & McDaniel, 2012). McDonald's takes the biggest impact of economic segment on its costs of operations. If a target country has sound economic conditions with good industrial growth, controlled rate of inflation, stable exchange rate, and good living conditions for the general public, McDonald's has attractive opportunities to grow in that country due to low uncertainties and risks related to economic forces. Converse to this situation, if some country has poor economic conditions and low industrial growth, it is less feasible for McDonald's to target such country.

The income levels of consumers have a leading impact on their consumption patterns towards fast food products. McDonald's offers its products at a higher price than many other fast food restaurant chains. Therefore, it cannot target all the income groups of the society. Similarly, when the inflationary pressures go higher in a country, the purchasing power of consumers is negatively affected which further decreases their affordability for high-priced fast food products (Blythe & Megicks, 2010). These inflationary pressures also increase the costs of operations, marketing expenditures, and general administrative costs for the company. As a result, the company has to decrease its profit margins, or otherwise, transfer this negative impact to the general consumers by making its products more expensive (About McDonald's, 2011).

Competitive Analysis for McDonald's using Michael Porter's Five Forces Model of Competition

Like other industries, the competitive environment in the fast food industry is characterized by five different competitive forces. These forces are; rivalry among existing top level competitors, threat from new entrants, threat from the substitute products, the bargaining power of suppliers, and the bargaining power of customers (Jenny & Scammon, 2010). The two most significant forces which help fast food companies in dominating their competition effectively include rivalry among existing top level competitors and the bargaining power of customers against these fast food companies. These two forces are explained below in detail:

i. Rivalry among existing Top level Competitors:

McDonald's is the largest fast food restaurant chain in the world having more than 34,000 outlets in 119 countries around the Globe (McDonald's, 2013). Therefore, its major competition stands with the other large scale multinational fast food chains; like KFC, Burger King, Yum Brands, Wendy's, Starbucks, Pizza Hut, etc. These large scale competitors are also operating with their large network of restaurants and outlets; thus, create a strong competitive environment for McDonald's. All these competitors use extensive advertising and promotion to attract potential customers (Lamb, Hair, & McDaniel, 2012). They offer the same high quality products for the same target market. Therefore, these top-notch competitors are also a big threat for the sales, profitability, and overall financial performance of McDonald's all over the world.

ii. The Bargaining Power of Customers:

The bargaining power of customers is very strong in the Global fast food industry due to the presence of a large number of competitors. The products offered by these competitors have varying tastes, ingredients, quality, and price which give a greater choice to consumers to select their favorite products from a range of alternative choices. For example, McDonald's Big Mac has equally competitive hamburgers offered by KFC, Burger King, Wendy's and other top fast food chains. This strong bargaining power directly impacts the company's marketing mix strategies, i.e. The way it manufactures its products, sets their pricing, uses promotional techniques, and makes them available to the potential consumers through physical outlets and online ordering.

McDonald's Strategies to address the Rivalry and Bargaining Power of Consumers

The rivalry among existing competitors has been growing due to the extension in their business networks globally. This competition is further complemented by the entry of new competitors who are offering similar and substitute products. In the presence of this strong competition, McDonald's has to ensure that its competitors do not snatch its customers with the help of their competitive products and extensive advertising and promotional campaigns (About McDonald's, 2011).

In order to beat the competition and maintain its market leadership in the Global fast food industry, McDonald's focuses on the quality and taste of its products. It manufactures fast food products that best match the cultural and societal values and preferences of consumers in every target country. In order to deal with the strong bargaining power of consumers, McDonald's makes every effort to attract consumers through discounts, promotional offers, and family packages. McDonald's staff serves its consumers in a highly efficient way which is also helpful in strengthening their brand loyalty for this fast food chain.

External Environment of McDonald's

The external environment consists of potential threats and opportunities which companies in an industry face during the normal course of their business operations (Kotler, 2010). The available opportunities help them grow competitively while threats make them weaker or stronger depending upon the reaction which these companies show to these threats. The analysis of the external environment for McDonald's is as follows:

i. Threats:

Competition has always been the biggest threat for McDonald's. The top industry rivals like Burgers King, Wendy's, Pizza Hut, KFC,…

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