Introduction
This essay covers and analyses the process of internationalisation of a multinational firm from an advanced economy, investing in a developing or emerging country. We wish to understand the institutional framework and resource-based views that led to the decision to internationalise. This essay also covers the issues associated (likely) with distance and attempts to layout the resources i.e., knowledge, financials and ability to navigate to sustain and thrive in new lands.
Chosen multinational for this study is McDonald’s, the largest fast food restaurant chain in the world, symbol of American culture, while the host market is India, 5th largest economy by nominal and 3rd largest by PPP. This entry is interesting from the point of view of eating habits as India cuisine has a large repertoire of indigenous food that can be cooked in 15-20 minutes, also the emphasis on healthy food by mothers.
McDonald’s – Largest fast food restaurant chain in the world
McDonald’s is the world’s largest fast-food restaurant chain with over $112bn system-wide and $23.2bn through over 40000 restaurants, owned as well as franchised, across 120 countries. The restaurant was established in Bernardino, California in 1940’s as a hamburger stand by the McDonald brothers. In 1954, Ray croc convinced the brothers to franchise out and eventually bought their share in 1961 (Love, 1986).
The growth of automobiles and state highways created conditions for the brand’s success. The Brand has continuously evolved to introduce new products i.e., BigMac Hamburger in 1968, company has grown to be one of the top brands and ranks 36th amongst top brands globally with assets of over $56.3Bn (Annual Report ,2020).
Key success factor behind MacDonald’s growth and rise as world’s largest fast-food chain would be ‘convenience’ (Jim Nelson) Restaurants are so located in suburban towns and cities that you are never more than a few minutes away by car or by foot. This does not take away credit from another key ingredient of its success, the ability to serve a wide range of customers, at a very affordable price (Key Success Factors of McDonald’s, n.d.). The outlets maintain a clean and happy ambience that morphed into eating out places for families in many international markets.
India – Fastest growing large ‘Emerging Market’
India is the fastest growing large economy falling into the category of emerging markets as (IMF Country Report No. 21/230) it was amongst the fasted growing economies in the world for a decade, lifting roughly 400 million out of poverty, before the pandemic. National income increased 5 times between 2000-2019, thus creating a large middle class with purchasing power.
Figure 1: GNI India
With a median age of 28.4 in 2020 (India Population (2022) - Worldometer, n.d.), below 30 years constitute 60% of country’s population, it creates a long-term earning and consuming class. It creates the possibility of a substantial shift in the shopping mindset of Indian consumers towards popular brands and products (Deloitte, 2011). With economic liberalisation and relaxation on FDI during mid 90’s, it made ample sense for McDonald’s to participate in the market. Before entering India, McDonald’s was already operating in over 116 countries, had over 3600 restaurants in Asia, 2500 of them in japan alone (Langert, 2019).
After Japan, next were emerging economies of China and India along with Middle East region. McDonald’s made a successful entry into China in 1990, opening their first restaurant in Shenzhen (The History of McDonald’s in China, 2017). India became their next destination.
Literature analysis and review
There are multiple factors, internal as well as external, that play a role in the success and failure of firms, making a leap across their home base into other countries. A firm operating in its home environment has a better understanding, therefore can manage and navigate business environment to achieve objectives. It can deliver better results and execute a quick and effective turnaround. It is not necessary to go across the border to grow always, as one can continue to re-segment and cater to newer emerging consumer groups but it may mean repositioning the brand, which is not an easy exercise always. When a company ventures abroad, success is not guaranteed. Thus, risk mitigation is an important aspect of analysis i.e., familiarity with the foreign market, competitive landscape, national institutions, Consumer habits.
Thus, unified framework for analysis for a global business, adapting internationalisation strategies can help the organisation manage the risks better and avoid costly failures. I have used these frameworks to analyse and interpret McDonald’s internationalisation process and its franchise agreements with Connaught Plaza restaurants and Hard Castle restaurants. Under the unified framework approach, initial focus is on Resource based view, analysing firm’s specific resources and capabilities. All foreign firms face the issue of ‘Liability of Outsidership’ in the host country and the first act of guest firm is to mitigate this liability, possibly turning it into an asset. A great factor that aids in doing so are its unique & sustainable resources, products and services, which can create significant competition.
A VRIO framework has been utilised in this study to understand McDonald’s resources and lay out the sustainable competitive advantage they have. Resources that are value creating, unique, difficult to imitate and internationally seeded, should be considered strategically relevant (Collinson et al., 2020). However, not all resources of the corporation are unique thus may not help create a competitive value-added strategy.
Institution based view involves the game’s informal and formal rules governing and dealing with equal treatment of domestic and foreign firms, culture, norms, value that play an important role in determining the success and failure of foreign firms around the globe. Established institutions, such as banks and courts, as well as the ability to enforce contracts, all play a role in determining transaction costs. Host countries, with low uncertainty, stable policies and sound legal redressal system, help smoothen decision making for guest firms which also measure factors like impact of rapid globalisation on the firm’s market's growth while doing business away from its domiciled country.
Firms do follow a staggered stage model for internationalisation too where a foreign firm moves stage by stage to enter a foreign market. It conducts a market analysis and the and makes entry in stages like licensing, franchising, joint venture partnership and wholly owned subsidiaries (Mike W Peng author, 2016).
Internationalisation
McDonald’s as a business idea was designed to expand as it expressed the brand vision very simply and clearly “In business for yourself, but not by yourself” (‘Ray Kroc’, 2013), and witnessed steady internationalisation post the IPO. Beginning with the first store outside the USA in 1967, Canada, Puerto Rico and has constantly evolved. The company continued to learn, innovate and implement newer ideas throughout its history including a Big Mac, Egg Muffin and even ‘Drive through’ window concept. It is offering differentiated products, customer-friendly locations and gratifying customer services and building a stellar reputation of affordable and healthy food. All this has helped McDonald’s create a stellar brand equity that is prohibitively expensive and time-consuming to replicate for competitors. The brand symbol, Golden Arch, is distinct, ubiquitous and is symbol of American capitalism in most parts of the world.
Germany (first European restaurant), Australia and then to Asia, is testimony to brand’s global ambition and relentless execution to realise that ambition. Important strategic decisions are a key factor to their success with consideration for both internal and external factors. While considering going to foreign market, like all other companies, McDonald’s too considers the risks and mitigates by adapting or tweaking to local needs and sensibilities, i.e., local marketing to appeal to the local consumers to build relationships and trust.
From beginning, McDonald’s focussed on
· Standardisation,
· Cleanliness,
· Service
· Great value
These are prerequisites for simplifying operations, whether based within or outside national borders. It started the internationalisation in stages, essentially into growth-oriented markets which provided a geographical diversification. It was one of the first firms to recognise the value of Franchising, fully owned and Joint venture companies as per the needs or dictates of markets, same as products. Big Macs are served without cheese in Israel (Kosher). In Malaysia and Singapore, it bears a halal (“clean'', “acceptable'') certificate, indicating the total absence of pork products.
In UK, 70% of restaurants are company owned while Australia, Canada, Japan (Subsidiary), New Zealand and Germany, the Company uses a mix of Joint venture and franchise model depending on the risk assessment etc. (McDonald’s History, n.d.). The company developed a franchising model that included an upfront franchise fee, a share of revenue, and rent on the building owned by McDonald's (O'Malley, Ouellette, Plourde, & Roy 2009). Franchised restaurants represented 93% of roughly 40000 McDonald's restaurants worldwide on December 31, 2020 (Financial Information, n.d.).
McDonald's has used acquisition as a strategy for growth, beginning with Boston Chicken in 2000, to improve the consumer experience (Query Builder | Acquisitions, n.d.). Franchise use Brand imagery, iconography, global product portfolio, recipes, process, training in lieu of the Fee. Dynamic Yield Ltd. was acquired in 2019 to assist restaurants in varying their electronic menus, item display, and basis parameters such as weather, i.e., more coffee on cold days and McFlurries on hot days, depending on the time of day or regional preferences.
Internationalisation and entry into Indian Market
The country's food palette includes over a hundred different types of elaborate meals as well as quick, nutritious meals. India primarily is a vegetarian meal market, with 45–50% of the population identifying as primarily vegetarians (Ram, 2016). McDonald’s made its first attempts to understand the market in mid 1970’s. Post economic liberalisation of India in 1991, McDonald’s started tracking the trends in fast changing consumer habits. Survey constituted by McDonald’s pointed that Indian consumer were keen on American style burgers but didn’t believe it could be substitute for wholesome Indian meal. The Indian ‘Eating Out’ market was substantial but highly fragmented with no organized pan India player. There were plenty of fast-food options serving multiple cuisines i.ee, Udupi, Chaats, Namkeens, Pav Bhaji, Wada Pav, Pizza, Sandwich, Burgers and Chinese. Few regional or city specific chains with limited outlets existed i.e. Nirulas, Wimpys, Sagar Ratna, Kwality, Woodlands, Kamat’s and Tibb’s Frankie.
In 1993, McDonald’s registered a 100% Subsidiary in India under the name McDonald’s India Pvt ltd (MIPL). Company reached out to few Indian entrepreneurs. MIPL signed up 50:50 JV partnerships, with an investment of $5mln each (Ahluwalia, 2017).
· Connaught Plaza restaurants India Pvt ltd (CPRL) for North and East of India
· Hard castle restaurants Pvt ltd (HCRL) for South and west of India
It took convincing by the company that it was willing to localise and change as per local needs. As Amit Jatia, managing director HCRL said that McDonald’s willingness to localise convinced him. " They promised that there would be no beef or pork on the menu” (‘How McDonald’s Conquered India’, 2014). The duration of the agreement was for 25 years. The India strategy was four phased: Entry, building the supply chain, aggressive growth and penetration.
McDonalds’s exclusively set up quality international standard suppliers and distributors locally in India (Ahluwalia, 2017). There was substantial tech infusion and investment to build all this. Over a period most of these players also supplied to McDonald's in Europe and Asia (Pangarkar et al., 2010).
First restaurant was opened in Delhi in 1996, followed soon after by the Mumbai restaurant. Initially these two biggest metros were targeted as these areas had high proportion of Target consumers. In the second phase, cities closer to Mumbai and Delhi, Pune and Gurgaon respectively, were targeted. High footfall areas i.e., Markets, Malls, corporate parks were targeted for new restaurants.
Franchise route has been McDonald’s preferred method of internationalisation for decades. However, in case of India, lack of large entrepreneurial base to choose from for partnering along with lack of quality supplier base may have prompted the Joint venture route. The firm had to do heavy lifting in creating a whole vendor/Supplier network in the background. The choice of having two JV partners was an important part of risk mitigation given the large size of India.
Advantages of Alliance with Local Partners CPRL & HCRL
· Alliance with local partners like HCRL with decades of experience in running consumer businesses (Forbes India - Amit Jatia And McDonald’s 15-Year Wait For Success, n.d.) part of a large Indian conglomerate, provides an edge to McDonald’s as the family understood long run view and could finance the losses.
Similarly, CPRL owned by Bakshi, was a renowned name in high end property circles and running his hospitality business. A self-made millionaire, Bakshi is director in many companies including biggest movie theatre chain PVR (MarketScreener, n.d.).
· Alliance, partners were in a good position to help overcome the local bureaucratic, political concerns that were normal for country coming to terms with liberalisation
· Partners being in Hospitality, understood the consumption trends, had deep pockets, they were fit to invest in delivering innovative and quality services to consumers
· Possibility of McDonald’s presence in the largest multiplex chain could have been a good proposition as well
Despite the vast global experience of working with partners across geographies, McDonald’s still had to encounter some obstacles in the Indian market.
Indian Market challenges
Menu challenge - Beef burgers were and still are taboo in Hindu majority India, where cows are revered and beef is prohibited. McDonald’s had to develop a special menu with large vegetarian content (over 60%) including eggless sandwich sauces, to meet Indian tastes, preferences. McDonald’s doesn’t offer beef and pork items in India. They recreated some of their products using spices as per Indian Palate and taste i.e., McVeggie burger, Veg. Pizza and McAloo Tikki burger.
Competition – India has its own version of quick service restaurants, with large cuisine to choose from i.e., Udupi, Nirulas (regional chain), Wimpeys, Sagar Ratna. Add to it KFC too entered around the same time. It became important for McDonald’s to change the perception of it being ‘American’ and unhealthy fast food. The brand chose the positioning of ‘Indian’ and promoter of Indian family values and culture. The communication used children, parents, and elderly grandparents to promote a place for family outings, subtly instilling in Indian mothers the idea that the restaurant served healthy food
Problem with Partner – In 2008, McDonald’s offered to buy out the stake of JV partner, CPRL, for a sum of $5mln (Ahluwalia, 2017) and the matter went through a series of legal battles over valuation and other rights. The issue was finally settled in 2019 but the Brand lost out to competition in terms of expansion. The JV with other partner was converted into a franchise agreement around 2008-09.
Pricing Factor –Consumers mentally measure the value they receive for the price they pay and it must always exceed the price. McDonald’s was conscious of not pricing it too cheap and not overcharging, thus they offered products at various price point starting with a McAloo Tikki Burger for Rs20 as a penetration strategy. To induce trials, they used Softy and Burgers at slightly higher prices than other restaurants. Overall, Pricing of Nirula’s, a Delhi based chain, was benchmarked (‘How McDonald’s Conquered India’, 2014).
Political Volatility –Entry of American Multinationals (KFC & McDonald’s) in food industry was opposed by farmers in many parts of the country in 1996. Politicians, animal rights activists, all went up in arms but largely vegetarian menu, with no beef or Pork and other precautions based on solid research made these protests go away slowly (‘To Curry Favor in India Debut, McDonald’s Sells Maharaja Macs’, 1996).
If we analyse from the point of resource-based view the most valuable and indispensable thing for McDonald’s is the brand, followed by standardisation, flexibility/adaptability. Brand and its flexibility have most of what is required to offset the liability of outsidership and compete strongly. McDonald’s has time and again demonstrated that it remains on fair side of trading. It takes people all walks, trains them through youth opportunity and language communication programs (McDonald’s, 2019), gives back to society and maintains an admirable corporate social responsibility program.
A Resource-Based view comprising of, Value, Rarity, Imitability and Organisational (VRIO framework) aspects of the resources and capabilities of McDonald’s is used to analyse its relative competitiveness. VRIO framework brings a sustained advantage for McDonald’s Corporation owing to its unique strengths i.e., Well recognised brand, Standardisation, Flexibility, Value for Money, ability to innovate and adapt as per environmental needs.
Table 1 VRIO Analysis of McDonald’s Corporation.
Resources and Capabilities | Value Creating | Rarity | Imitability | Organisation | Competitive Implication |
Global Brand Recognition (McDonald’s is the biggest Quick Service restaurant chain, ranked 36th top brand in the world) | Yes | Yes | Yes | Yes | Sustained Advantage |
Considerate Corporate Social Responsibility (CSR) Image (McDonald’s provides educational training and employment through youth opportunity Language skill programs – gives back to society ) | Yes | Yes | No | Yes | Temporary Advantage |
Global Presence and Brand Portfolio (McDonald’s operates over 39000 outlets in 120 countries. It is an adaptive organisation despite emphasis on standardisation and offers a wide range of exceptional products worldwide | Yes | Yes | Yes | Yes | Sustained Advantage |
Socialising at McDonald’s (McDonald’s outlets from the beginning were positioned as family eating places, a place for meeting & dining with family and friends along with quality service) | Yes | Yes | Yes | Yes | Sustained Advantage |
An institution-centric view assesses the complex, fast evolving relationship between the corporate organisation and the emerging market environment. Domestic as well as foreign firms do face and incorporate strategies to deal with Political, Societal and Legal challenges. A Joint-Venture with HCRL, was good while the one with CPRL, led to bad blood and a legal battle. Relationships with partners helped McDonalds with the formal rules of the game, Jatia family’s (HCRL) goodwill and the social brand image acted as social (Jains & strictly vegetarians) and political shield, nudged bureaucracy in terms of treatment uniform treatment of foreign and domestic firms. Furthermore, this factor has helped fuel the firms' progress. Other than formal rules, Ray Kroc had laid down McDonald’s values much before its internationalisation. Their mission statement, "The basis for our entire business is that we are ethical, truthful and dependable.” (McDonald’s, 2019, p2) talks about the values which they inherited and imbibed as an organisation. Add to this, rich Indian culture of family outings together must have given new insights to McDonald’s into human values. Result is that they have positioned the brand as family eating place.
Conclusion
For many firms, international' growth is a very important part of their long-term growth strategy. McDonald’s internationalisation process which started in 1967 with Canada and extending into an emerging market of India, seems to have worked out well. Half of Indian operations, now run as a franchise model while the other half is manged by the company as last reported. It could have done better but for the time lost in legal battles ceding momentum to competition i.e., Pizza Hut, KFC. Currently there are roughly 468 restaurants in India as of December 2021 (Corporate McDonald’s). Overall Indian operations are profitable since 2007-08 as mentioned by both Partners in their respective interviews (Forbes India - Amit Jatia And McDonald’s 15-Year Wait For Success, n.d.).
From that perspective McDonald’s bet on India in early days of liberalisation seems to have paid off. Eating out culture is growing, with quick service restaurants (growth of 17% CAGR 2016-2020) and restaurant chains controlling 54% of the market. Overall market is expected to grow to the size of $11bn by the year 2025(India Quick Service Restaurant (QSR) Market Report 2021 - ResearchAndMarkets.Com, n.d.). McDonald’s just needs to continue its focus on Product innovation and opening newer stores with Menu refresh. Brand is loved and is part of the growing up years of post economic liberalisation generation.
McDonald’s venturing into the Indian market is a case of business humility, learning and adaptation. Even though MacDonald’s had tremendous international experience previously, it adapted to a joint-venture strategy instead of acquisition or any other process. Subsequent literature and media reports put the reason for opting for JV was the lack of knowledge on part of firm in terms of navigating Indian bureaucracy and laws, which JV partners brought into this relationship. Nevertheless, it was a wise move by McDonald’s to infiltrate a market that has multitude of options. Further growth in Indian Market, depends on Firm’s ability to continue innovation and adopt distinct marketing and brand positioning.
Reference
Johnson, C. (1997). The New Rich in Asia: Mobile Phones, McDonalds and Middle-Class Revolution. Edited by Richard Robison and David S. G. Goodman. London and New York: Routledge, 1996. xii, 253 pp. $65.00 (cloth); $19.95 (paper). The Journal of Asian Studies, 56(1), 156-158. doi:10.2307/2646358
Deloitte. (2011). Indian Retail Market, Embracing a New Trajectory https://www.google.com/search?q=Indian+Retail+Market%2C+Embracing+a+New+Trajectory&rlz=1C1VDKB_enIN933IN933&oq=Indian+Retail+Market%2C+Embracing+a+New+Trajectory&aqs=chrome..69i57j69i60.249j0j7&sourceid=chrome&ie=UTF-8
Collinson, S., Narula, R., Rugman, A. M., & Qamar, A. (2020). International Business, 8th Edition. Pearson Education, Limited. http://ebookcentral.proquest.com/lib/suss/detail.action?docID=6401141
Mike W Peng author. (2016). International business (Second edition..). Cengage Learning EMEA.
Ahluwalia, H. (2017, December 25). Inside the McDonald’s-Vikram Bakshi controversy. Mint. https://www.livemint.com/Companies/Jxj8A0RLE0CkpWOoboaJ6J/Inside-the-McDonalds-Vikram-Bakshi-controversy.html
Financial Information. (n.d.-a). Retrieved 20 March 2022, from https://corporate.mcdonalds.com/corpmcd/investors/financial-information.html
Forbes India—Amit Jatia And McDonald’s 15-year Wait For Success. (n.d.). Forbes India. Retrieved 21 March 2022, from https://www.forbesindia.com/article/marwari-power/amit-jatia-and-mcdonalds-15year-wait-for-success/37353/0
How McDonald’s conquered India. (2014, November 19). BBC News. https://www.bbc.com/news/business-30115555
India GNI Per Capita 1962-2022. (n.d.). Retrieved 15 March 2022, from https://www.macrotrends.net/countries/IND/india/gni-per-capita
India one of the fastest-growing large economies: Niti Aayog CEO. (2022, February 22). IndBiz | Economic Diplomacy Division. https://indbiz.gov.in/india-one-of-the-fastest-growing-large-economies-niti-aayog-ceo/
India Population (2022)—Worldometer. (n.d.). Retrieved 15 March 2022, from http://srv1.worldometers.info/world-population/india-population/
India Quick Service Restaurant (QSR) Market Report 2021—ResearchAndMarkets.com. (n.d.). Retrieved 22 March 2022, from https://finance.yahoo.com/news/india-quick-restaurant-qsr-market-132900020.html
It’s Official: McDonald’s Acquires Boston Market. (n.d.). QSR Magazine. Retrieved 20 March 2022, fromhttps://www.qsrmagazine.com/news/its-official-mcdonalds-acquires-boston-market
Jeon, H. J., Meiseberg, B., Dant, R. P., & Grünhagen, M. (2016). Cultural Convergence in Emerging Markets: The Case of McDonald’s in China and India. Journal of Small Business Management, 54(2), 732–749. https://doi.org/10.1111/jsbm.12168
Johnson, C. (1997). The New Rich in Asia: Mobile Phones, McDonalds and Middle-Class Revolution. Edited by Richard Robison and David S. G. Goodman. London and New York: Routledge, 1996. xii, 253 pp. 19.95 (paper). The Journal of Asian Studies, 56(1), 156–158. https://doi.org/10.2307/2646358
Kays, C. (2017). McDonald’s Corporation: Regilding the golden arches. SAGE Publications Ltd.
Key Success Factors of McDonald’s. (n.d.). Bizfluent. Retrieved 15 March 2022, from https://bizfluent.com/list-7427367-key-success-factors-mcdonald-s.html
Langert, B. (2019). The Battle to Do Good: Inside Mcdonald’s Sustainability Journey. Emerald Publishing Limited. http://ebookcentral.proquest.com/lib/suss/detail.action?docID=5630185
Love, J. F. (1986). McDonald’s: Behind the Arches. Bantam Books.
MarketScreener. (n.d.). Vikram Bakshi—Biography. Retrieved 21 March 2022, from https://www.marketscreener.com/business-leaders/Vikram-Bakshi-06YJMQ-E/biography/
McDonald’s Brand Ranking | All Brand Rankings where McDonald’s is listed! (n.d.). Retrieved 15 March 2022, from https://www.rankingthebrands.com/Brand-detail.aspx?brandID=7
McDonald’s History. (n.d.). Retrieved 15 March 2022, from https://corporate.mcdonalds.com/corpmcd/our-company/who-we-are/our-history.html
Munshi, N. (2012, September 4). India: Home of the meatless McDonald’s. Financial Times. https://www.ft.com/content/6c18c3c6-7358-3ea4-b742-fe6d94a821e4
Pangarkar, N., Singh, K., & Heracleous, L. (2010). Business Strategy in Asia: A Casebook (3rd edition). Cengage Learning Asia.
Query Builder | Acquisitions. (n.d.). Crunchbase. Retrieved 20 March 2022, from https://www.crunchbase.com/search/acquisitions/field/organizations/num_acquisitions/mcdonalds
Ram, S. (2016, June 15). Vegetarians vs Non Vegetarians percentage in India. WorthvieW. https://www.worthview.com/vegetarians-vs-non-vegetarians-percentage-india/
Ray Kroc. (2013, June 30). Leaders Beyond the Brand. https://leadersbehindthebrand.wordpress.com/ray-croc/
Schlosser, E. (2012). Fast Food Nation: The Dark Side of the All-American Meal. Houghton Mifflin Harcourt.
Singh, K., Pangarkar, N., & Heracleous, L. (2003). Business Strategy in Asia: A Casebook. Undefined.https://www.semanticscholar.org/paper/Business-Strategy-in-Asia%3A-A-Casebook-Singh-Pangarkar/031e738113bec5bf19424b8c74955ba2fd69e58a
The History of McDonald’s in China. (2017, December 4). Chinese Language Blog | Language and Culture of the Chinese-Speaking World. https://blogs.transparent.com/chinese/the-history-of-mcdonalds-in-china/
To Curry Favor in India Debut, McDonald’s Sells Maharaja Macs. (1996, October 17). Christian Science Monitor. https://www.csmonitor.com/1996/1017/101796.intl.intl.4.html
