International businesses
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model-answer-5.3.pdf
BTEC Business Studies 5.3
MODEL ANSWER
Strategic and Operational Approaches to Developing International Trade
McDonald’s (MCD)
McDonald's is a fast food, limited service franchise with over 35,000 restaurants in more than 100 countries. This global giant employs more than four million people worldwide. McDonald's serves 70 million customers per day, generating a total of $75.18 million daily.
McDonald’s serves a variety of burgers which alternates with special promotions, alongside their famous fries and a range of branded drinks, such as Coca-Cola. They also sell desserts including Apple Pies and McFlurry ice creams. Generally, their menus vary (in size, options, etc) depending on which country the branch is located in.
McDonald’s operates in the tertiary sector because they sell their own products themselves. The company operates on a nearly global basis; countries which they don’t operate in include North Korea, Zimbabwe, Iceland and a few more. McDonald’s supply chain is local for meat and vegetable/fruit suppliers, while coffee beans are sourced from South America. McDonald’s serves the food and retail market.
McDonald’s opened their first UK branch in 1974, which has since then expanded to 1,250 restaurants in the UK. The main method of expanding their business internationally is through franchising, along with using licensing from other companies to make new products.
In the UK, there are around 1,250 restaurants with 600 being franchises. Many franchisees own multiple McDonald’s branches. For example, Paul Crocker is the franchisee who owns all restaurants in Dover, Canterbury and Thanet, as well as the Ashford Designer Outlet McDonald’s restaurant.
MCD have also used licensing to create new products under their own name. Their
McFlurry range in the UK includes Oreo, Dairy Milk, Toffee Crisp and many more options which rotate throughout the year. They have also used licensing/partnerships for their drinks range, including their famous partnership with Coca-Cola which has been ongoing since 1955.
The McDonald’s menu features a wide selection of meals, snacks, drinks, and more. This includes their most famous burgers, the Big Mac, Chicken Legend, Cheeseburgers and many more. The different options available at McDonald’s depend on the country in which the branch is located. The Big Mac was introduced in the Greater Pittsburgh area, USA, in 1967 and nationwide in 1968. It is one of the company's most recognised signature products. It consists of 3 buns, 2 beef patties, pickles, onions, lettuce, tomato, cheese and Big Mac sauce.
Big Mac
Chicken McNuggets are a type of chicken product offered by McDonald's, which they introduced in 1983. They consist of small pieces of processed chicken meat that have been battered and deep fried. In the UK, McNuggets can be purchased as a part of a Happy Meal (4), as a regular/large meal (6) or as a box of 6/9/20.
The McDonald’s menu varies around the world due to different cultures, legislations and religious aspects in different countries. For example, marketing used for McDonald’s in India is focused more on vegetarian consumers due to the religious
customs of the country but also features meat burgers inspired by Indian cuisine, such as the Chicken Maharaja Mac, the Indian equivalent of a Big Mac. McDonald’s also adapts their own burgers to a traditional meal in that country. In Germany, McDonald’s offers the Nürnburger, a mini bratwurst sandwich.
McDonald’s drinks range offers a variety of carbonated beverages in different sizes as well as hot and bottled drinks. Their most popular drink is Coca-Cola, the carbonated drink company which has had a partnership with McDonald’s since 1955. In many countries, beer is also available for purchase. This includes Germany, Spain, South Korea, Holland, Portugal and many others.
The McDonald’s Apple Pie is a crispy pie filled with hot apple chunks which is deep fried. In the US and other countries, customers can choose between deep fried and baked pies.
Baked (US) Fried (UK) Many
McDonald’s processes and products have been adapted to better suit different countries and cultures. For example, in India
instead of the Big Mac, McDonald’s serves the Chicken Maharaja Mac, a poultry version of their classic burger. This is due to the Indian culture and religion, which prohibits eating beef. In the US, customers can order baked apple pies, as it is a traditional dessert in the country. In some countries where the legislation for alcohol may be different, McDonald’s serve alcoholic beverages, particularly beer. In general, McDonald’s tends to adapt different items in their menus to different countries as well as adding new and exclusive items to that country. By doing this, they have shown great flexibility as well as an understanding of different cultures. It has also demonstrated that customers are not only just numbers to the company; they actually take their feedback into consideration in order to perfect their services and menu to their consumer base. Subsidiary Business A subsidiary business is where a parent company owns 50% or more of another company’s shares. The parent company controls the subsidiary business but they are still able to expand overseas. The subsidiary must pay taxes and follow the laws of the country relevant to them. Companies can expand overseas by establishing a subsidiary business in a different country or by purchasing the rights of another company. Youtube is a subsidiary of Google. The advantages are reduced risks, enables businesses to expand internationally, and subsidiary businesses can use the experience/knowledge of the main business and vice versa. The disadvantages are local knowledge may not be suited for the parent company and some may disagree with being taken over as a subsidiary company by a parent company, leading to disagreements
Joint Venture A joint venture is a limited time contractual agreement between two businesses for a mutual gain. For example, businesses can share expertise and information to reduce risks. The most common type is when producers enter a joint venture with suppliers (e.g.: farmers and supermarkets). The 2008 joint venture launched by NBC Universal Television Group ,21st Century Fox and The Walt Disney Company to create the enormously popular video streaming website “Hulu” is one example of a large scale partnering of companies that has been very profitable.The advantages of a joint venture are that it allows for business growth without borrowing money, increases the capacity of the companies involved and risks can be dealt with by both companies. The disadvantages are that there may be communication problems, there may not always be an equal distribution of power and knowledge between both companies and cultural differences between the businesses may lead to disagreements. Partnerships Partnerships are similar to joint ventures but they are usually indefinite and create a closer pact between the two businesses through legal processes. In partnerships, profits, liabilities and resources (physical and human) are all shared between the two businesses. Firms in partnerships work almost as one combined company. An example of a partnership is Uber and Spotify; this allows passengers to enter an Uber car and listen to their Spotify playlists during their journey. The advantages are that it is easy to establish and start-up businesses
(costs are low), more capital is available for the businesses and income splitting can be done as it is an advantage due to resultant tax savings. The disadvantages are that the liability of the partners for the debts of the business is unlimited, each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts, there is a risk of disagreements and friction among partners and management and each partner is an agent of the partnership and is liable for actions by other partners. Agencies Agencies are specialist organisations which help businesses to expand internationally by providing certain services or products. For example, some organisations will help businesses with customs while some can translate contracts and other business related documents. The CIA is a type of agency whose primary mission is to collect, analyze, evaluate, and disseminate foreign intelligence to assist the President and senior US government policymakers in making decisions relating to national security. The advantages are they can exchange information and contacts internationally, identifying opportunities internationally is easier and companies can keep international control of products in new countries. The disadvantages are loss of control in marketing and additional costs such as distribution costs. Licensing Licensing is an agreement that allows businesses to manufacture another business’ product. Licensing can give permission to another business to sell services, expertise or even ideas on behalf of the licensor. Licensing agreements can be used to cover copyright patents and other forms of agreements. Disney is a prime example of licensing; companies use their brand image and recognisable characters to sell a certain product, such as clothing or toys. The advantages are support is available for the licensee, it is easy access to new markets for licensor and low investment required in expansions in new countries. The disadvantages are that licensors can lose track of production and licensees can damage the reputation of licensor if the process is not carried out properly. Franchising Franchising is an agreement where businesses pay to run a franchise of their original business in another country. The franchisor distributes their goods through a legal agreement to the franchisee. Franchising is a popular method of expanding and has been used by many businesses, especially fastfood and takeaway restaurants such as McDonald’s and Pizza Hut. The advantages are that franchises offer the independence of small business ownership supported by the benefits of a big business network, business experience is not required to run a franchise - franchisors usually provide the training you need to operate their business model, franchises have a higher rate of success than start-up businesses, it is easier to secure finance for a franchise. It may cost less to buy a franchise than start your own business of the same type and franchises often have an established reputation and image, proven management and work practices, access to national advertising and ongoing support. The disadvantages are that buying a franchise means entering into a formal agreement with a franchisor, franchise agreements dictate how you run the business, so there may be little room for creativity - there are usually restrictions on where you operate, the products you sell and the suppliers you use, bad performances by other franchisees may affect your franchise's reputation, buying a franchise means ongoing
sharing of profit with the franchisor and the franchisor do not have to renew an agreement at the end of the franchise term. Subcontracting A business practice where the main contractor hires additional individuals or companies called subcontractors to help complete a project. The main contractor is still in charge and must oversee hires to ensure the project is executed and completed as specified in the contract. Chiplime is a British subcontracting construction company. They acquire contracts for large scale projects, such as the Emirates Stadium, then subcontract other companies to complete the project that they were assigned. The advantages are that this method is useful for specific projects, low investment required, lower costs due to self employment of subcontractors and fixed costs for the contractor. The disadvantages are that it is expensive in the long term, there is less loyalty from subcontractors, loss of control from the service provided is possible and less motivation from self contractors. Outsourcing Outsourcing is a method of choosing an external agency to perform certain services or provide certain products. This includes payroll systems, call centres, telesales, etc. An example of a famous outsourcing company is IBM, a firm which specialises in technology outsourcing services such as credit/debit card readers. The advantages are that the outsourced vendors have specific equipment and technical expertise, most of the times better than the ones at the outsourcing organization. Effectively the tasks can be completed faster and with better quality output. Outsourcing certain components of a business process helps the organization to share many responsibilities with the outsourced vendor. The disadvantages are that when an organization outsources HR, Payroll and Recruitment services, it involves a risk of exposing confidential company information to a third-party. Outsourcing can be very cost effective, but at times there are many hidden costs regarding signing contracts internationally. I believe that McDonald’s has used franchising effectively because their image is very easy to sell, therefore people will be attracted to their restaurants. This will also persuade franchisees to take the McDonald’s franchise on and invest in the company, which is beneficial for McDonald’s in many different aspects. Expertise and intellectual costs have been well spent because McDonald’s is able to understand international markets in depth and adapt their menus and restaurants to different countries. McDonald’s has also invested heavily in staff training in order to be able to run their restaurants efficiently, interact with customers in the correct manner and ensure the safety of the food produced in the kitchens. The company’s organisational structure is both centralised and decentralised; the menu for all the McDonald's restaurants in one region or country is the same but they differ from other countries due to religious/cultural reasons. Furthermore, decisions made by managers from each restaurant are adapted in order to apply the most suitable solution to their problem. This is very effective because it allows McDonald’s to be versatile and adaptable while still maintaining their image and original values.
Influencing Factors of International Businesses Organisation is the structure and coordination of systems. It includes the formal arrangement of roles, responsibilities and relationships within an organization. Organisation is a tool which relates to the strategy of companies and is a success factor that is greatly important. In companies, organisation is used for hierarchical role structures. In international businesses, multiple hierarchical structures must be produced which determine the roles of different districts, regions and whole countries. Capital Costs Capital costs are fixed, one-time expenses incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services. It is the total cost needed to bring a project to a commercially operable status. Examples of capital costs include land on which the project is built, permits and licenses, work equipment and more. Capital costs are costs that represent high levels of investment in permanent assets that are required to operate the business. Businesses must be able to determine the appropriate way of investing; these capital costs include franchising or licensing and many other methods of investment. Revenue Costs Revenue costs are the costs which businesses must consider when expanding. These costs are paid using the revenue generated from sales of their service(s) and/or product(s). This includes wages for staff, rent, advertising, utilities, raw materials and any other extra costs. Expertise/Intellectual Capital Costs Expertise and intellectual capital is the cost of expert knowledge from specialised staff working in a company. These are skills that have either been developed through training and experience, however, companies can hire staff who are specialists in certain areas of work. Training Costs for Local Labour Training costs for local labour are the costs for training new staff in different countries or the training for current staff in order to adapt to new environments. Companies must invest in staff training, especially in international markets, in order to maintain their versatility in different markets. This includes training on how to operate machinery, sales training or how to offer specific services or products. Organisational Structure of International Business Organisation is the structure and coordination of systems. It includes the formal arrangement of roles, responsibilities and relationships within an organization. Organisation is a tool which relates to the strategy of companies and is a success factor that is greatly important. In companies, organisation is used for hierarchical role structures. In international
businesses, multiple hierarchical structures must be produced which determine the roles of different districts, regions and whole countries. Centralised Decision Making Centralised decision making is the process of undertaking all decisions from the core of the business. Companies offering a branch or franchise in another country control many aspects of their operations such as the products, services, packing and delivery method. However, there are many disadvantages to centralised decision making in international business; many aspects of a business in one country may not be equally appropriate for a different country. Decentralised Decision Making Decentralised decision is the opposite of centralised decision making. This means that decisions are made by local managers for their branch of a franchise in order to make the most appropriate decisions. The authority for decision making entirely depends on the structure and hierarchy of a business, it is what permits people in certain roles to undertake important decisions. McDonald’s has used a variety of different strategies and resources in its US market in order to expand exponentially and eventually become a multi-billion business. Their main method for expansion was the franchising strategy, where franchisees can start a business under the franchisor’s name. Currently there are over 14,000 franchises in the US and the main reason for this global presence is because of McDonald’s friendly and almost nostalgic image which attracts customers to their restaurants every day. Franchising has allowed the company to generate a large amount of income, most of which is used to continuously expand. Their capital has been well invested in order to continue opening new locations all over the US. Their expertise and thorough analysis of the American market has allowed McDonald’s to determine the correct menu items, size and service that should be provided to customers. The reason for the difference between US sizes and other global counterparts is because people in different countries have different dietary needs. This differentiation has been proven to be effective because although the resources required to make a normal meal are increased, their prices are proportionate to the meal and the average consumer will likely still purchase these meals. McDonald’s has invested into employee training heavily in different markets, especially in the US where their largest consumer base resides. Their customer service, which revolves around being fast and friendly, understanding customer needs and enjoying their job, is what makes McDonald’s employees provide customers with the best service possible. They are also trained to work in a team dynamic, with different sections of the restaurant working together as one. For example, the kitchen must have good communication with the front counter to ensure that specific details are met in order to satisfy the customer as much as possible. Similarly, the kitchen must communicate with workers managing the stock, so that they may continue to operate the kitchen with no interruptions.
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