Published by MBA Skool Team, Last Updated: February 15, 2022
Porter’s Five Forces Analysis of McDonald's covers the company’s competitive landscape as well as the factors affecting its sector. The analysis focuses on measuring the company’s position based on forces like threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers and competitive rivalry.
McDonald's Five Forces analysis helps to analyze its current position in the market based on factors like competitors, customers, suppliers, financial strength & alternate solutions.
Let us start the McDonald's Porter Five Forces Analysis:
Threat of New Entrants:
The threat of new entrants in the McDonald's Porter Five Forces Analysis can be explained as follows:
McDonald’s is one the leading fast-food brands with a global presence. The fast-food market is highly saturated because of many players competing to capture the market share. All these companies have existed for a long time and now are reaping the benefits of economies of scale. Any new firm joining the competition will initially have to incur substantial setup costs if it wants to have a country-wide reach of its restaurants and at the same time spend on marketing and advertisement to establish its brand image. The firm must maintain a standardized process from procurement of raw materials to assembling the final product for uniformity across all the outlets. This can be a tricky feature as people need to be regularly trained for the same. However, suppose a firm wants to start with small, in that case, there is a diverse range of suppliers to choose from. It can establish its distribution channel through online food delivery platforms, subsequently lowering the infrastructure costs. Considering the above factors, it can be said that McDonald’s faces a moderate threat from new entrants in this market.
Threat of Substitutes:
Below are the threats of substitute products of Porter’s Five Forces analysis of McDonald's:
McDonald’s is considered as a fast-food option globally, and therefore, many people prefer their full meals over burgers.
Consequently, it is substituted by other brands like Subway, Dominos, Pizza Hut, KFC etc., which provide a similar experience. With the coming up of online food delivery options, local restaurants have become more accessible, thus increasing the availability of substitutes in the market. There is a huge increase in ready to cook meals and tiffin delivery options which are also direct substitutes for McDonald’s. As people are shifting towards leading a healthy lifestyle, they are focusing more on home-cooked meals. Plus, due to the advent of covid, some people have become apprehensive of eating from outside. Due to the huge number of substitutes available in the market, the consumer can switch his food options at any time. This increases the threat of substitutes in the market for McDonald’s.
Bargaining Power of Customers:
In the McDonald's Porter Five Forces Analysis the bargaining power of the customers can be explained as:
Even though the product’s intricacies might vary, the overall product offered by any fast-food chain is the same. Therefore, the switching costs are low, making it more important to keep the customer engaged by satisfying them. Customer loyalty is low in this segment which increases the bargaining power of buyers. Food is a subjective topic, and consumers’ preferences often change from time to time. McDonald’s needs to continuously innovate their menu and bring up new products while also managing cultural changes. Hence, it isn't easy keeping up with their new expectations. Factors like an increase in disposable income of the buyers and changes in lifestyle, which nudges the customer towards healthier and luxury items, affect the sale of fast-food items. Many casual or fine dining restaurants offer these options and attract customers. The customers do not purchase in large volumes and might affect only a fraction of McDonald's revenues, but because they are widely spread and are easily influenced; hence they gain power.
Therefore, the bargaining power of buyers is relatively high for McDonald’s.
Bargaining Power of Suppliers:
Following is the bargaining power of suppliers in the Porter’s Five Forces analysis of McDonald's:
McDonald’s procures majority of its raw material from suppliers and has an exclusive partnership contract with most of them, thus enabling it to have authority over the suppliers. It closely monitors the quality and service provided by the suppliers to maintain the standard of final product served to the customers. The distribution is done via multiple distribution centers, making checking even more smooth. The product sold by the supplier is undifferentiated. There are many suppliers available in the market, the switching costs are low, and there is a minimal chance of forward integration. These factors considerably push the bargaining power of the supplier to a weaker end.
The impact of key competitors in the McDonald's Porter Five Forces Analysis is as follows:
Considering the fast-food market, many competitors exist that directly impact the sale of McDonald’s in the market. Most of these competitors continuously adapt to palettes of various flavors and sell at competitive prices. Primary competitors include Burger King, KFC, Wendy’s, Burger Singh, etc. Because there is a lack of differentiation and low switching costs, it becomes easier for the customer to switch options. Moreover, McDonald’s has focused on a Vegetarian menu for a very long time. Thus, customers usually shift to KFC for non-vegetarian options. However, due to changes in demand, McDonald’s is not aiming to introduce more chicken related products to cater to the non-vegetarians.
Even though McDonald’s enjoys some first-mover advantage, there exists an intense rivalry among the competitors.
To conclude, the above McDonald's Porter Five Forces Analysis highlights the various elements which impact its competitive environment. This understanding helps to evaluate the various external business factors for any company.
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