Business Economics Assignment Report - Business Analysis & Strategies

This assignment report provides a comprehensive analysis of McDonald's from a business economics perspective. It begins by examining the company's position within the global fast-food retail industry, characterized by an oligopolistic market structure, and applies Porter's five forces model to assess the competitive landscape. The report then delves into McDonald's expansion strategy in China, including its joint venture with CITIC Capital, and discusses the benefits of nationalization. Furthermore, the assignment explores the international product life cycle of McDonald's signature hamburger, concluding that it is in the maturity stage. The report also highlights McDonald's market-oriented approach, emphasizing its focus on market research and customer preferences to tailor its products and services to diverse consumer needs. The report uses various academic sources to support its claims and analyses.

Running head: BUSINESS ECONOMICS
Business Economics
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1BUSINESS ECONOMICS
Table of Contents
TASK 1............................................................................................................................................2
Answer a).....................................................................................................................................2
Answer b).....................................................................................................................................5
TASK 2............................................................................................................................................7
Answer a).....................................................................................................................................7
Answer b).....................................................................................................................................9
TASK 3..........................................................................................................................................11
Answer a)...................................................................................................................................11
Answer b)...................................................................................................................................13
TASK 4..........................................................................................................................................15
Answer a)...................................................................................................................................15
Answer b)...................................................................................................................................17
References......................................................................................................................................19

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TASK 1
Answer a)
McDonald’s is one of the largest global fast food companies. This American company
was founded in 1940 in California, with signature food item, hamburger, and in the past few
decades McDonald’s has established itself as the dominant market player across the globe. It
operates in the global fast food retail industry. This industry has a structure of oligopoly. As
defined by Johan (2017), oligopoly market structure consists of moderate number of sellers,
among which there are few large sellers, and a huge number of buyers. The sellers in this
structure are the price makers and not price takers. There are some large firms that dominate the
entire market. It is quite competitive and there are both price and non-price competitions among
the suppliers. The sellers sell similar but differentiated products, which are not perfect but close
substitutes of each other. These sellers in the oligopoly structure act as a group, therefore, a
decision taken by one firm is responded by others to retain their market share. Along with these,
there is another striking characteristic of this market structure of the global fast food industry.
Madsen and Gosliner (2020) explained that the major firms in this industry has a monopoly
power on their signature product, which gives market power to them, such as, McDonald’s is
preferred for its hamburgers, KFC is preferred for its fried chickens and Starbucks is preferred
for its coffee over other products they offer. Thereby, it can be said that McDonald’s is one of
the largest fast food sellers that exploits its market power from the customers’ preference for
hamburger. It is the price maker and any price decision by McDonald’s is matched by other
competitors in the market.

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The competition within this market structure for McDonald’s can be evaluated using
Porter’s five forces model. This is a very useful analytical framework to understand the forces
that create competition with an industry and highlight the potential areas for decision making,
and strategy development for future growth. The five forces of this model are threat of new
entrants, threat of substitutions, bargaining power of suppliers, bargaining power of buyers and
competitive rivalry (Moreno-Izquierdo, Ramón-Rodríguez and Perles-Ribes 2016).
Figure 1: Porter's five forces framework
(Source: Moreno-Izquierdo, Ramón-Rodríguez and Perles-Ribes 2016)
Threat of new entrants indicates the level of entry barriers or difficulties for the potential
entrants in the industry. The less are the entry barriers, higher is the chance for new entrants and
higher is the risk of competition for the established businesses. In the fast food industry, the entry
barriers are quite low and threat for new entrants is high. The startup cost and switching cost
are low in this industry, with highly variable capital cost and that create scope for market entry
for the new entrants. The smaller businesses can involve low capital while entering the market
and they may be successful in capturing the local customer base (Gerard 2018).

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Threat of substitution is high in this industry. The sellers sell similar fast food and
hence, availability of substitutes is high and low switching cost for the consumers. Moreover, the
competition in terms of product quality and customer satisfaction is high, implying high
performance-to-cost ratio. The bargaining power of suppliers is comparatively low in this
industry as there are large number of suppliers for raw ingredients and these suppliers are not
vertically integrated and therefore they cannot influence the supply and distribution of the
products to the companies. On the other hand, bargaining power of consumers is very high in
the fast food industry. As there are many food joints providing similar food at almost similar
price range, and the switching cost is low, consumers can easily change their brand preference.
Lastly, the competitive rivalry is very high in the fast food industry. Various large competitors
with global presence and also smaller regional firms provide tough competition, with large
number of substitutes and the marketing is done aggressively (Baburaj and Narayanan 2016).
It can be concluded from the above analysis of fast food industry that, McDonald’s faces
tough competition from four forces, like, industry rivals, bargaining power of the consumers,
threat of new entrants and threat of substitutes. Since, the number of substitutes is quite large,
and consumers have very low switching cost, hence, the competitiveness for McDonald’s is very
high. The product and customer service quality must be focused and high for all time in all its
location (Hamzeh and Bataineh 2019).

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Answer b)
McDonald’s has a strong presence in China. It has plans to expand its business through
4500 restaurants across the country. The business expansion was announced after a joint venture
with CITIC Capital, CITIC Ltd., and Carlyle Capital. The government owned investment group
acquired 52% stake of McDonald’s for a payment of $2 billion in 2017 and it would have full
ownership rights of the existing restaurants of McDonald’s as well as the new outlets also for the
coming 20 years (China Briefing 2017). This was aimed for securing the better business
locations for McDonald’s and enabled the fast food company to transfer almost all company-
owned outlets to the franchises. This move was beneficial for McDonald’s for reducing business
risks that could arise from competition in the industry (Zhu, Anagondahalli and Zhang 2017).
The joint venture with the Chinese company, CITIC group, is beneficial for the American
fast food giant for running its business in China. The Chinese government is implementing
harder policies and regulations against the American companies as a retaliation to the trade war
with the USA. The joint venture of McDonald’s with the Chinese firm would protect the fast
food company from the new policies unfavorable to American business (Cahill 2018). Hence, if
the Chinese government would plan to impede the growth of the American company, that would
have hurt the investment and growth of Citic also, and that would not be beneficial for the
Chinese economy.
There are a few benefits of nationalization of businesses. Feng, Johansson and Wang
(2018) highlighted that nationalization of businesses can ensure a coordinated approach towards
production and supply of goods and services for achieving a stability in the market. Secondly,
nationalized businesses often create natural monopoly in the infrastructural sector, which could

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be beneficial to other businesses and people. In this regard, the example of railways can be cited.
The centrally funded railways in a nation is advantageous for transporting products at lower
costs, and for reducing road traffic and pollution (Voszka 2017). Thirdly, nationalized businesses
share their profits with the tax payers unlike the private businesses as the taxes generate revenue
for the government. Fourthly, nationalization enables a business to expand further and achieve
larger economies of scales. Due to the state support and investment, businesses can expand with
a less chance of financial risk and failure. Fifthly, the confidence of people and the employees
are higher in case of nationalized business due to security provided by the government and
hence, that helps in the businesses growth. For example, in case of bank failures, the recovery is
quick for nationalized banks than the private banks (Ait-Laoussine and Gault 2017). Thus, it can
be said that McDonald’s with their joint venture with the nationalized company Citic will have a
better growth opportunity in China.

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TASK 2
Answer a)
The international life cycle of a product refers to the growth and evolution of the product
overtime and across the national border. The international life cycle is heavily dependent on the
marketing program of the company on both the domestic and international platforms. Product
lifecycle includes four stages, namely, introduction, growth, maturity and decline, and the
concept of international product life cycle includes market development and economies of scale
integrated with the four fundamental stages of product life cycle (Hauschild, Rosenbaum and
Olsen 2018).
Figure 2: Product life cycle framework
(Source: Hauschild, Rosenbaum and Olsen 2018)
In the first stage, that is, introduction, the product enters the life cycle and it is
characterized by limited distribution, frequent modifications to product, and high level of
promotion. There is high chances of failure, with high production and marketing costs and low

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sales volume. In the second stage, the product starts experiencing growth that is, increasing sales
and profit, and competition in the market. In case of businesses, many large firms acquire small
firms that have reached the growth stage. Aggressive brand promotions are done at this stage.
Distribution is another major success factor in the growth stage. Long term relationships are
established with distributors and dealers, and towards the end of the growth stage, firms achieve
economies of scales, where prices fall and production and profits increase (He, Luo and Huang
2019). Third sage is maturity. Sales of the product grows but at a decreasing rate. The product
that reaches this stage, stayed in the market for a long time. Marketing is focused on variations of
the products, that is, line extension. The last stage is the decline or death. In this stage, both the
sales and profit go down for the product. Changes in the consumers’ tastes and preferences,
availability of new entrants and substitute products are the major factors contribute in the decline
of the product. Eventually, the product moves out of the market (Kobayashi, Matsumoto and
Fukushige 2018).
McDonald’s is famous for its burgers and hamburger is its signature product. All over the
world, the demand for the signature Big Mac hamburger is very high even though there are other
substitutes available from another rivals. The company makes slight differentiation in the
hamburger depending on the cultures of the countries they are operating in. However, due to
large number of rivals with similar products in the market, the sales of McDonald’s is rising at a
decreasing rate (Dilday 2018). Hence, the company is planning and implementing measures to
make their hamburger and other products more appealing to the customers through quality,
packaging and branding to maintain or boost their share in the competitive market (Ceil 2017).
Therefore, it can be said that the signature hamburger of McDonald’s is in the maturity stage. It
has captured a market share already, and currently, it must maintain, if not increase, the market

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share. Hence, product quality is being enhanced, aggressive marketing is conducted for the
mature product, that is, hamburger as its sales increase at a slower rate. To maintain the business,
McDonald’s has also introduced several other products on the menu, some of which are
variations of the hamburger (Chen 2019).
Answer b)
McDonald’s is a market oriented global company. As stated by Tomczak, Reinecke and
Kuss (2018), a market oriented company is one that invests substantial amount in market
research to understand what the market wants and produces or supplies those. McDonald’s
makes its business decisions and products based on market research. They focus on customers
and their preferences quite significantly. The target market of McDonald’s comprise of people of
all the age group, from children to the elderly people and therefore they have designed their
menu for customers of all age group (Christopher 2016). Moreover, they have different food
options for different times of the day, for example, McDonald’s serves healthy breakfast food
from 7am till 10am in the morning. This is a market oriented approach of business. The breakfast
items are not available after 10am, and this marketing technique has been beneficial for
attracting a large number of customers who prefers healthy breakfast. To create the breakfast
menu, McDonald’s invested large amount of money for market research for understanding the
preferences of the target market in each of the countries where they operate. For example, in
Hong Kong, McDonald’s serves macaroni in their breakfast menu as it is healthier than
cheeseburger and the people of Hong Kong prefer macaroni in their breakfast (McMillan 2017).

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Moreover, in Hong Kong, McDonald’s introduced the ‘double’ strategy, such as, double fish
fillet burgers and double cheeseburgers as the target market prefers the burgers with double
material on them. Thus, McDonald’s has introduced some special items as per the national food
culture in different countries along with their traditional hamburgers and french fries (Keller
2019). Hence. It is evident that McDonald’s is a market oriented company and not a cost oriented
business.

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TASK 3
Answer a)
Market power can be defined as the ability of a business or a group of organizations to
increase and maintain the market price above the level that would have prevailed under the
monopoly market structure. The practice of market power often results in reduced output level
and loss of the economic welfare (Stats.oecd.org 2020). It is also known as pricing power. The
different market structure has different level of market power, for example, the suppliers or
businesses provide homogenous products and there are large number of suppliers in the market.
Hence, the market power of the individual sellers are insignificant. On the contrary, in a
monopoly market structure, there is a single supplier in the market and therefore the market
power is highest for the seller, for which the price is determined and maintained by the seller
only. In case of oligopoly, the group of sellers has substantial market power to control the price.
Hence, according to the market power theory, businesses aim to increase their market power by
taking different strategies and one of those is to expand the size and operation capacity. Merger
and acquisition (M&As) is one such activity in which businesses merge for improving their
capability to set the market prices by decreasing the output level or by colluding. However, it has
also been noticed that increase in the merger activity is more likely generates operational
efficiency of the firms rather than increasing market power (DePamphilis 2019). A study by
Blonigen and Pierce (2016) showed mergers and acquisition activities led to a rise in the average
markup prices, although that had little evidence on its impact on the plant level productivity. The
authors also did not find substantial evidence of whether the M&A activities increase the