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Five Forces Analysis: McDonalds

Potential Entry of New Competitors Rating: Moderate

The low switching costs allow consumers to easily move from McDonald’s toward new fast food restaurant companies.

Also, variable capital costs of establishing a new restaurant empowers new businesses to enter the global fast food restaurant industry. For example, small restaurant businesses involve low capital costs compared to major corporations in the market.

Many small and medium businesses lack the resources to create a strong brand to match the McDonald’s brand.

Potential Development of Substitute Products Rating: Strong

There are many substitutes to McDonald’s products, such as products from artisanal food producers and local bakeries. Also, consumers can cook their food at home.

It is easy to shift from McDonald’s to substitutes because of the low switching costs. For example, shifting from the company to substitutes typically involves insignificant or minimal disadvantages, such as slightly higher costs per meal in some cases, or additional time consumption for food preparation. Moreover, substitutes are competitive in terms of quality and customer satisfaction (high performance-to-cost ratio).

Bargaining Power of Consumers Rating: Strong

The ease of changing from one restaurant to another (low switching costs) enables consumers to easily impose their demands on McDonald’s.

Because of market saturation, consumers can choose from many fast-food restaurants other than McDonald’s.

The availability of substitutes is relevant in this external analysis. For example, substitutes include food kiosks and outlets, and artisanal bakeries, as well as microwave meals and foods that one could cook at home.

Bargaining Power of Suppliers Rating: Weak

The large population of suppliers weakens the effect of individual suppliers on McDonald’s Corporation. This weakness is partly based on the lack of strong regional and global alliances among suppliers. In relation, most of McDonald’s suppliers are not vertically integrated. This means that they do not control the distribution network that transports their products to firms like McDonald’s

The relative abundance of materials like flour and meat reduces individual suppliers’ influence on the company.

Rivalry among existing competitors Rating: Strong

The fast-food restaurant industry has many firms of various sizes, such as global chains like McDonald’s and local mom-and-pop fast food restaurants.

Most medium and large firms aggressively market their products.

Low switching costs make it easy for consumers to transfer to other restaurants, such as Wendy’s and Burger King. This external factor adds to the force of competition.