McDonald's External and Internal Environment Analysis

Introduction to McDonald's and Its Business Environment

McDonald's is the world's leading fast food restaurant chain, with more than 34,000 outlets in 119 countries. It is an American multinational corporation headquartered in Oak Brook, with business operations spanning all six major operating regions of the world. McDonald's serves more than 69 million customers every day — a figure that speaks to the extraordinary success of this corporation in the global fast food industry. It was founded in 1940 by Richard McDonald and Maurice McDonald as a small barbecue restaurant (McDonald's, 2013).

McDonald's experienced rapid growth in the global market when American businessman Ray Kroc purchased the chain from its founders and began expanding it through franchising. Today, more than 80% of McDonald's restaurants and outlets are owned by private investors from local and international markets. The mascot Ronald McDonald was first introduced in 1967 and is now recognized as a trademark of the brand in every corner of the world. McDonald's has an extensive product line that 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).

This paper analyzes the external and internal environment of McDonald's by examining general environmental forces — specifically social, cultural, and demographic forces as well as economic forces — competitive forces using Porter's Five Forces model, and the company's internal strengths and weaknesses. The paper also evaluates McDonald's core competencies, resources, capabilities, and value chain, all of which have contributed to its position as the top market leader in the global fast food industry.

General Environmental Forces: Social, Cultural, and Economic Influences

A large number of forces are present in the external business environment of McDonald's, including political and legal, social, demographic and cultural, economic, technological, and environmental forces (Blythe & Megicks, 2010). The two forces that rank highest in their influence on McDonald's are social, cultural, and demographic forces and economic forces.

The leading segment of the general business environment for the fast food industry is social, cultural, and demographic forces. These forces relate to the lifestyles, preferences, cultural and societal values, demographic and geographic characteristics, behaviors, and attitudes of general consumers in a country or region. They shape the way business organizations perform and compete in the marketplace (Jenny & Scammon, 2010). All corporate, business, and functional level strategies are formulated with these social and demographic forces in mind (McDonald's, 2013). In the fast food industry, these forces play an important role in shaping consumer preferences toward fast food products and influencing behavior toward different industry participants (Lamb, Hair, & McDaniel, 2012).

McDonald's feels the impact of these forces most strongly in its product lines and marketing strategies. The company must offer fast food products that align with the tastes, preferences, and cultural values of its target consumers. For example, it cannot offer products that are prohibited in certain religions or are culturally inappropriate in specific regions. Similarly, it must choose ingredients carefully in order to avoid criticism and consumer boycotts (McDonald's, 2013). Consumer tastes and preferences vary from region to region — some consumers prefer spicy and peppery foods, while others, being more health-conscious, demand low-calorie options. McDonald's must therefore account for these preferences when targeting different cultures and societies (Blythe & Megicks, 2010).

Economic forces are the second most influential environmental segment for McDonald's. They include economic conditions, inflation, income levels, exchange rates, industry growth, and the earning and spending patterns of consumers, corporations, and governments (Lamb, Hair, & McDaniel, 2012). McDonald's is most directly affected by the economic segment through its costs of operations. If a target country has sound economic conditions — strong industrial growth, controlled inflation, a stable exchange rate, and good living standards — McDonald's has attractive opportunities to grow due to lower uncertainty and risk. Conversely, poor economic conditions and low industrial growth make a country a less viable target market.

Consumer income levels have a particularly strong impact on spending patterns related to fast food. McDonald's prices its products at a higher level than many competing fast food chains, which means it cannot effectively target all income groups. When inflationary pressures rise, the purchasing power of consumers is reduced, further limiting their ability to spend on higher-priced fast food products (Blythe & Megicks, 2010). Inflation also increases the costs of operations, marketing, and administration for the company. As a result, McDonald's must either accept lower profit margins or pass the increased costs on to consumers through higher prices (About McDonald's, 2011).

Competitive Analysis Using Porter's Five Forces

Like other industries, the competitive environment in the fast food sector is characterized by Porter's five competitive forces: rivalry among existing top-level competitors, threat from new entrants, threat from substitute products, the bargaining power of suppliers, and the bargaining power of customers (Jenny & Scammon, 2010). The two most significant forces in shaping competition for fast food companies are rivalry among existing top-level competitors and the bargaining power of customers.

McDonald's is the largest fast food restaurant chain in the world, with more than 34,000 outlets in 119 countries (McDonald's, 2013). Its major competition comes from other large-scale multinational fast food chains, including KFC, Burger King, Yum! Brands, Wendy's, Starbucks, and Pizza Hut. These large-scale competitors also operate extensive restaurant networks, creating a strong competitive environment. All of these rivals invest heavily in advertising and promotion to attract potential customers (Lamb, Hair, & McDaniel, 2012). They offer similarly high-quality products to the same target markets, making them a significant threat to McDonald's sales, profitability, and overall financial performance worldwide.

The bargaining power of customers is very strong in the global fast food industry due to the large number of competing firms. The products offered by these competitors differ in taste, ingredients, quality, and price, giving consumers a wide range of alternatives from which to choose. For example, McDonald's Big Mac faces direct competition from comparable hamburgers offered by KFC, Burger King, Wendy's, and other major chains. This strong bargaining power directly influences McDonald's marketing mix strategies — the way it formulates its products, sets prices, designs promotional campaigns, and delivers products to consumers through physical outlets and online ordering.