Signature Assignment: Challenges of Expansion to a Foreign Location (ATTN:AcademicResearchPro)

Running head: RESEARCH ANALYSIS FOR BUSINESS 0

Daniel Ortiz

Research Analysis for McDonald’s Business

ECO 561

Gary Wiessner

University of Phoenix

May 17, 2017

Research analysis for McDonald’s

McDonald’s operates in the foods and beverages market. The market structure in this case is that of monopolistic competition. McDonald’s has a huge presence in the US fast food market, and according to statistics, the company owns a 17% market share in the US market. The company has more than 34,000 outlets in 118 countries. Although the company is a dominant player, it faces competition locally and internationally. Some of the major competitors are listed below;

The foods and beverages market has barriers to entry for new and potential competitors. Brand loyalty is the first barrier. New players face competition from existing and established brands trusted by the target clients. The other barrier is the high cost of investment in supply chain and distribution networks. New entrants are unable to establish as many outlets as established brands making it difficult to attain competitive pricing, and optimize economies of scale.

Macroeconomic Indicators

The current stage of business cycle for McDonald’s is the Post Maturity stage. The company is at a point where it is expanding its presence to tap into new markets.

The GDP of the US has been below 3% for the last 10 years. In 2010 it had risen to a high 2.5% after that it remained below that value (Carlin, & Soskice, 2014).

The inflation rate in the US market for the last three years has ranged between 0.7% and 2.2%.

The unemployment rate in the US has been declining in the last three years with the statistics showing that it was 6.6% in 2014, 5.7% in 2015, and 4.9% in 2016 (United States. 2013).

The federal funds rate changes every month and the currently agreed rate stands at 1%. The current federal prime rate is at 4.00%.

Trends in Demand

Demand is measured indirectly by observing the growth in annual revenue of the company. The trend in quarterly revenue growth from 2014 to 2016 is reliable in explaining the demand for McDonald’s products;

Between 2014 and 2015, there was a general trend indicating a decline in demand but between 2015 and 2016, the general trend indicated a reverse to increase in demand.

The company should approach the market with the appropriate price strategy that can attract more clients over its opponents.

Pricing & Substitutes

McDonald’s use bundle-pricing strategy to attract clients to its food stores. There are other food stores and bakeries that offer high quality substitutes that clients can use to make their own products instead of going for McDonald’s products.

To determine the price elasticity of demand (PED) for McDonald’s products, the percentage changes in quantity demanded in a given quarter will be divided by the corresponding percentage change in price resulting in the change in demand. The change in PED will be compared with changes in other quarters within the year (Morgan, 2014).

If PED is elastic then sales volumes will increase with a decrease in price, and subsequently revenues will increase. In addition, increase the price of a product with substitutes will result in declining demand. However, if the product is inelastic, it has no substitutes thus an increase in price will increase revenues for the company.

Variable & fixed costs concept

Cost of production is critical in decision-making, and that means the contribution of fixed and variable costs are important to the management of the firm. The existence of variable cost is an indication that total cost affects the marginal cost of production (Kinney & Raiborn, 2013).

Fixed cost: The fixed cost remain unchanged with changes in the units produced. Fixed cost covers cost related to acquisition of fixed assets like land and machinery, space needed to perform business operations, it also covers the cost of leasing the same business space.

Variable cost: This cost changes with the change in number of units of products or service produced.

1. Labor cost: the cost of direct labor affect the cost of production. An increase in cost of labor increases the production by its equivalence and hence the price of the final product will increase otherwise the marginal returns will reduce.

2. Raw material cost: the cost of material has a direct effect on the cost of production. An increase in the cost of raw material results in an increase in the cost of production. This will lead to reduced output because of likely loss of demand due to high pricing.

3. R&D cost: the cost of R&D is factored in the cost of producing a product or a service. Researching into potential new markets will give the firm into potential markets that can help increase its sales.

Conclusion & Recommendation

McDonald’s need to review its franchising terms to make it favorable to expand its presence globally. Some of the franchises have closed down and that creates negative branding to the company. Positive relationships and better terms with its partners will see the company regains some of the lost market share. The pricing strategy should also be reviewed to allow the company to reduce some of the prices if its products and compete more favorably.

In terms of managing future productivity, the firm should align its forecast with the market trend in demand for the firm’s products. If the unemployment and inflation rates continue to rise the firm has a chance to dominate the market by exploring outside markets where inflation is not as high as in the US. The firm has the chance to take advantage of the favorable funding terms based on the rates available, to expand its operations internally and externally (Stengel & Business Expert Press, 2011).

The fact that the firm is a dominant player, reducing its prices will make it the preferred destinations for fast foods among its target clients as compared to its competitors. The demand and elasticity aspects of the company’s products makes it easy for the company to review the prices of its products downwards because the substitutes and the switching costs for the same presents a real threat. The current stage of the business cycle means the firm is likely to experience stagnation if the clients feel the lack of drive to purchase McDonald’s products. The firms needs re-energizing and the only way to achieve that is to penetrate new markets and create new products.

References

Carlin, W., & Soskice, D. W. (2014). Macroeconomics: Institutions, instability, and the financial

system.

Kinney, M. R., & Raiborn, C. A. (2013). Cost accounting: Foundations and evolutions.

Morgan, K. (2014). Price elasticity of demand for mylan laboratories, pittsburg. Place of

publication not identified: Grin Verlag Gmbh.

Stengel, D. N., & Business Expert Press. (2011). Managerial economics: Concepts and

principles. New York, N.Y.] (222 East 46th Street, New York, NY 10017: Business

Expert Press.

United States. (2013). Long-term unemployment: Consequences and solutions : hearing before

the Joint Economic Committee, Congress of the United States, One Hundred Thirteenth

Congress, first session, April 24, 2013.