McDonald's Strategy Analysis: Porter's Five Forces & PESTLE

Introduction

McDonald's is one of the most recognized brands in the world and has been highly successful throughout its history. The company reported revenues of $22.7 billion and assets of $30.2 billion (MSN Moneycentral, 2010). This report utilizes several analytical tools to examine McDonald's strategy and how the firm navigates its competitive environment.

Porter's Five Forces Analysis

The first tool to consider is Porter's Five Forces, a framework that outlines the key cost and price drivers within an industry. Pricing power on both the supply and demand sides is critical to maintaining profitability. The five forces are supplier power, buyer power, threat of new entrants, threat of substitutes, and intensity of rivalry (QuickMBA, 2010).

McDonald's holds tremendous power over its suppliers for two main reasons: its purchasing volume is enormous, and many suppliers are dependent on that volume. Because the inputs are not especially differentiated, McDonald's retains significant switching leverage. The company exercises moderate pricing power over its customers as well. Its strong brand drives consumer traffic, and customers tend to be less price-sensitive at McDonald's than at many competing fast food chains.

There are few barriers to entry in the fast food industry, although McDonald's significant economies of scale make it difficult for new competitors to reach a comparable level. The threat of substitutes is high, encompassing other burger chains, the broader fast food segment, and dining options of all kinds. The resulting number of players creates highly intense rivalry. Firms compete on brand, food type, and price simultaneously, making success a function of outperforming rivals on all three dimensions at once. Overall, this is an unfavorable industry in which to compete; most of the forces limit pricing power and therefore profit potential. McDonald's has offset these pressures through its size, brand strength, and market muscle, making the industry moderately favorable for the company specifically.

PESTLE Analysis

The PESTLE analysis examines the external environment from political, economic, social, technological, legal, and environmental perspectives. McDonald's operates within a generally positive political environment. Some regulations govern food safety and employment, but there is no significant negative political pressure on the company. The economic environment, however, has been more challenging. Even an affordable restaurant like McDonald's can represent a discretionary expense for some consumers, meaning that high unemployment and economic downturns reduce sales — a pattern that was evident in the period under review. The social environment remains broadly positive: despite a vocal group of detractors, the majority of Americans eat at McDonald's and hold a favorable view of the brand.

The technological environment is rapidly evolving but presents more opportunities than threats. McDonald's embraces new technologies in cooking, logistics, procurement, and marketing, and its competitive position has not been materially harmed by recent technological developments. The legal environment is generally favorable; while a company of McDonald's scale can expect to face litigation on multiple fronts, there are no major legal actions that would fundamentally alter how the business operates. The environmental dimension is the least favorable, primarily because the core business centers on beef, the company's restaurant model encourages automobile use, and packaging remains wasteful by some measures. These factors impose costs and reputational pressures, but concern for the environment has not yet prompted a fundamental shift in McDonald's business model.

Conclusion

Overall, McDonald's is a highly competitive company operating in a challenging industry. The fast food segment is characterized by all players competing as cost leaders, and within those constraints firms attempt to differentiate themselves. Competition is intense because barriers to entry are low, and once firms achieve sufficient scale they gain pricing leverage over suppliers. McDonald's addresses these challenges by keeping its menu fresh, building on a powerful brand, adopting an ethical leadership posture, and marketing aggressively.

By combining these tactics with the high operational efficiency demanded of a cost leader, McDonald's has successfully differentiated itself within the fast food sphere and secured the number one position in the segment. In part, this dominance reflects the fact that McDonald's essentially created the modern fast food industry, and the key success factors within the segment have largely been defined by what McDonald's does well. Its ability to match and absorb the innovations of countless competitors has further cemented its role as the dominant player in the industry and one of the world's most successful companies.

Works Cited

MSN Moneycentral. (2010). McDonald's. Retrieved December 9, 2010 from

QuickMBA. (2010). Porter's five forces. QuickMBA.com. Retrieved December 9, 2010 from http://www.quickmba.com/strategy/porter.shtml

The Independent. (2008). McDonald's in compost trial. The Independent. Retrieved December 9, 2010 from

Woodard, L. (2010). Ronald McDonald fallout: What role does advertising have in childhood obesity? ABC News. Retrieved December 9, 2010 from http://abcnews.go.com/Business/ronald-mcdonald-fallout-role-advertising-childhood-obesity/story?id=10298693