Introduction
As a result of massive globalization, many companies were previously content with operating in local markets have sought to venture into foreign markets. More so, the increased growth in the Asian markets has been a factor that has attracted many Western corporations to consider operating their businesses on the continent. Pegan, Vianelli & de Luca (2020) asserts that for a multinational corporation to enter into a foreign market, it first needs to identify the best entry modes. This is because the emerging market also counts as one of the market segments that the multinational corporation, and the consumption factors of the market may be influenced by market factors such as social, cultural, environmental, political, and cultural factors (Wood et al., 2021). However, the factors that determine the entry strategy differ regarding each region a company ventures into. One of the successful Western corporations that have greatly ventured into the Asian market is McDonald’s corporation. This report analyzes McDonald’s’ market entry strategies in the Chinese market. The analysis incorporates the evaluation of factors that drove the selection of the selected entry modes, advantages attained as well as challenges faced by the company due to the use of the identified foreign entry mode in China. Finally, the report offers ideal recommendations for future foreign market entry.
Literature review
Analysis of China’s business environment
China is a country that has experienced marginal growth leading to it being considered one of the upper-middle-income countries across the globe. Wenjing (2021)notes that the high growth rates in the country are a result of the increased resource-intensive manufacturing, exports, and low-paid labor. However, with the increase and growth of such factors reaching a limit, there are some imbalances in the country’s economic, social, and environmental contexts. This has led to the dire rise in the need to shift the company’s economy from manufacturing to high-value services and a shift from investments to consumption. Gu (2022) further reveals that the Chinese market is characterized by growing consumer income, hiking incomes, and an increasingly free and fair business environment. There also lies an increased rate of production costs in China, leading to reduced sales in the local markets. This creates room for Western international corporations to establish themselves in China.
The economic nature of China portrays it as one of the primary destinations of foreign direct investments across the globe. According to Gu (2022), foreign direct investment in China accounts for 27% of value-added production, 4.1% of the national tax revenues, and 58% of foreign trade. Currently, more than 190 countries invest in China, with more than 450 multinational companies that arere-ranked in the Global Fortune 500 companies. This has created room for many United States and other Western companies to desire to invest in China’s domestic market. The cultural environment of China presents the country as one with the highest population that has continuously grown by at least 15 million per year (Wenjing, 2021). The increased population is affiliated with the low death rates and increased birth rates across the country. More so, the population comprises many young people compared to the aging population.
Theory explaining foreign market entry modes
Western multinationals can employ the ideal foreign entry strategies to enter the Chinese market, including exporting, licensing, franchising, turnkey projects, joint ventures, and wholly-owned subsidiaries.
Exporting is one of the easiest foreign entry strategies into international markets, especially for firms beginning their international expansion. As Wood et al. (2021) defined, exporting entails the sale of products and services sourced from the home markets and into the foreign market. While considering exporting as the foreign market strategy, companies should consider the labeling, packaging, and pricing strategies employed in the market. The advantage of exporting is that international firms do not incur operational expenses in the new country. However, Ra (2020) underscores the need for such firms to have ideal distribution strategies, which ideally means getting into contractual agreements with the local distributors in the host country. This is a challenge to the firm as it would need to employ higher research costs to find the best way to build brand awareness of the brand to the potential buyers. Other disadvantages include transport costs which may be increased, and the possibility of tariffs in new markets, which may all result in a negative impact on the multinational’s profits.
The wholly-owned subsidiary also referred to as a greenfield venture, is a foreign market entry mode ideal for expansion. Pegan, Vianelli & de Luca (2020)notes that the entry mode is applicable when the multinational firm wants to have direct control of its operations in the foreign country. This is attained by establishing a wholly-owned subsidiary from scratch or purchasing an existing company in the host country. The advantages of having a wholly owned subsidiary are that the firm gains vast knowledge of the local market. The firm is viewed as an insider that employs locals and the parent company has full control over the subsidiary. However, Ra (2020) argues that setting up such a subsidiary requires high costs and is prone to high-level risks due to unknown market dynamics. Ideally, whole-owned subsidiaries may need a lot of time to set up and therefore a very slow entry.
The joint venture is an entry strategy by which two companies come together to establish a jointly owned business. In such an agreement, one of the two companies is usually a local company in the foreign country while the second is the multinational company. Pegan, Vianelli & de Luca (2020) asserts that it is left under new management provided by the two companies after forming the new venture. The advantages of using the joint venture are that the foreign company enjoys the benefits accorded to local companies of the host country. There is a vast knowledge area about the new market and an opportunity to share costs with the local company. However, the disadvantages noted by Wood et al. (2021) are that there may be a hardship in determining how to share profits. The companies may also mistrust the proprietary knowledge of the venture, culture clashes, and difficulties in determining the ideal time to terminate the formed relationship.
Foreign market entry can also be employed through licensing and franchising. Ra (2020) notes that if a company intends to venture into a foreign market while incurring minimal legal and financial risk, the best strategy would be through licensing agreements. Licensing allows the foreign company, the licensee, to sell the producer, the licensor, or use intellectual property in exchange for royalty fees. The licensing strategy allows the foreign company to use the licensor’s property. These include trademarks, production techniques, and patents of the mother company. On the other hand, the licensee is required to pay some fees to acquire technical assistance and the rights to intangible properties (Alon & Kruesi, 2019). Ideally, under the franchising model, the international company renders some rights to the company in the local market. Still, it ensures that the brand names in the products belong to the multinational company. Wood et al. (2021) highlights some of the advantages of using the licensing and franchise entry strategies. The Western corporation has easier entry into the new market, fewer legal requirements, and more understanding of prevalent issues that affect the consumption of products and services in the local company. However, the entry mode limits the level of control that the international corporation has on the local company.
The turnkey projects entail an international entry strategy through which a multinational company esports its technologies and processes in other foreign countries by building plants in such countries (Wood et al., 2021). The international company indulges the expertise of contractors to design and construct new facilities in the foreign country and train new personnel to be employed in the established facilities. Pegan, Vianelli & de Luca (2020) note that a major advantage of the turnkey projects is that multinational companies can establish a plant and earn profits in foreign countries. This is mainly possible when the foreign country has limited foreign direct investment opportunities or lacks expertise in some critical areas. However, the entry strategy has some shortcomings such as the possibility of company secrets being revealed to rivals. In other cases, there may be a risk of a hostile takeover of the plants by the host country.
Company Analysis
McDonald’s is one of the world’s most renowned first food chains around the globe. Opait (2019) notes that the first food restaurant was founded in 1940 by two brothers namely Richard and Maurice. It was initially opened as a BBQ joint but later turned into a fast-food restaurant which Ray Kroc later purchased. Under the management and governance of Ray Kroc, the restaurant opened its first franchises in Des Plaines, Illinois and therefore became a proper corporation. According to Wu (2022), McDonald’s is currently one of the top international brands with thousands of franchises across the globe, including countries such as Italy, Australia, Russia, China, Italy, New Zeeland, Netherlands, and the United Kingdoms, among others. Through its franchises, McDonald’s operates in some of the most highly demanding markets that have competitors who offer similar or almost similar products. However, to differentiate itself from competitors in emerging markets, MacDonald’s competes based on its menu varieties, product quality, price, and convenience.
Opait (2019) notes that as part of its operations, McDonald’s company has ventured into globalization, serving a wide range of customers in more than 117 countries globally. In 2017, the company had more than36,000 restaurants across 119 countries and employed more than 4.2 million people. Across the globe, McDonald’s serves more than 68 million customers, and it ensures that its operations in such countries are through franchises or its control. The company’s revenue is usually gained from royalties that comprise rent and other fees paid by its franchises and sales generated from restaurant operations. According to Opait (2019), McDonald’s the main food features offered by McDonald’s include burgers, appetizers such as French fries, chicken nuggets and sandwiches, and a wide range of ice creams. With its unique strategies and baselines of competition, McDonald’s has a higher competitive advantage in the local and international fast-food industry.
Analysis of the entry strategy in China
The foreign market entry mode employed by MacDonald in the Chinese market is franchising.Wu (2022) notes that in the new franchises formed in the country, high-quality products are offered at affordable prices. McDonald’s offers the new franchisee the right to sell its branded products as part of the franchise agreement. This ensures that McDonald’s has the operating power over the marketing strategies and the quality of products offered by the franchisees. McDonald’s may either own or lease the establishment as part of the franchise agreement. At the same time, the franchisee is responsible for purchasing equipment and fittings needed and the right to operate the franchise for 20 years (Roberts, Frazer & Thaichon, 2020). Since McDonald’s seeks to ensure that all its franchises are uniform, it underscores the need for standardized branding across all countries. The standardized branding is included in the menus, administrative systems, and the design layouts of the franchise.
Ideally, in 2017, McDonald’s formed a new joint venture in China. Lee, G., & Liu, Y. (2020) notes that the new joint venture was formed with CITIC Limited. The then formed group had full ownership of Macdonald’s existing restaurants in China and any additions in the next 20 years. McDonald’s seeks to ensure that it secures better locations for its expansion through the joint venture. Because the group with which Macdonald formed a joint venture with owns real estate, it may be ideal as it created room for McDonald’s to expand its footprint in China, especially in the 3rd and 4th tier cities. However, in 2020, CITIC Limited decided to sell a considerable percentage of its stake in the MacDonald fast-food operations in China. Rastogi (2019) reveals that this resulted from the venture lagging and failing to meet the vision 2022 sales growth plan due to high competition and costs.
Factors contributing to McDonald’s choice of entry modes in China
Alon & Kruesi (2019) asserts that for firms that seek to internationalize, they need to analyze and select the mode of entry that is most fitting to ensure that it makes the best use of available resources. Therefore, it is necessary to analyze the foreign country’s social, political, and economic institutions as they are key to understanding the business environment. Roberts, Frazer & Thaichon (2020) notes that some of the factors that led to the selection of franchising as the entry mode for MacDonald into China are the shifting demographics prevalent in the country. The increased incomes also include increased consumer spending and a free business environment. More so, the increased costs of production and reduced sales in Macdonald’s home market: the United States, is one of the reasons that drove McDonald’s to choose a franchise in China.
Ideally, the selection of also using joint ventures in China was driven by McDonald’s need to make China its second-largest market after the United States. Rastogi (2019) notes that the CITIC group was expected to open outlets in developing regions of China through the joint venture. Through a joint venture, Macdonald’s expected to attain knowledge of the local market and local resources. Lee & Liu (2020) notes that the lack of knowledge and resources in China are some factors that led to the multinational company falling behind other competitors such as KFC and Yam China. Therefore, the expectation was that MacDonald could regain its lost market share through the joint venture. Through relinquishing its control over some restaurants, local decision-making made by CITIC Limited would make it well-equipped and flexible to meet all consumer needs.
Advantages accrued to the chosen entry modes.
An advantage gained by McDonald’s due to the use of a franchise was the increase in the number of outlets leading to an increase in sales growth. Kee et al. (2021) affirm that the company has more than 1000 outlets, which implies its great success. China is highly affiliated with a high gross domestic product (GDP) per capita, a high population size, and high levels of urbanization. More so, through franchises, McDonald’s has managed to internalize the local knowledge of the Chinese people in its wider operations, thus meeting customers’ needs and therefore increasing sales. According to Alon & Kruesi (2019), the franchise strategy and the adopted marketing techniques earn companies a competitive edge amidst the rooming competitors.
The joint venture also enabled McDonald’s to have a broader footprint in China, especially with regard to reaching the third and fourth-tier cities in the country. Lee & Liu (2020) underscores the importance of the joint venture entry strategy in that it offers a company the chance to attain access to new markets, resources, and distribution networks. After getting into a joint venture, McDonald’s was able to introduce digitalized and personalized dining experiences for its Chinese consumers. This is one of the most common concepts among Chinese people. Therefore, through the joint venture, the company gained a broader knowledge and understanding of the dynamics of the Chinese people. Therefore, it was able to offer customized offerings that would foresee its shift towards being a major player with a competitive advantage in the country.
Difficulties faced due to the foreign entry modes.
While entering the Chinese market, MacDonald assumed that consumers in the country were similar to those in the American market. Kee et al. (2021) note that this created some difficulties for the company since it had entered intending to offer beef products. However, Chinese people love chicken more as compared to beef. By employing the franchise entry strategy, MacDonald failed to conduct an intensive analysis of the market, which led to the failures to meet consumer expectations. With McDonald’s setting uniform standards across all its franchises, the company faced some challenges because China is a non-uniform and non-homogenous country. Rastogi (2019) asserts that the Chinese provinces have different social, political, and economic dynamics and thus variance in consumer spending behavior. However, despite the noted failures of the joint venture employed in China, there are no notable difficulties experienced other than the lack of meeting the targeted vision 2022 estimates.
Conclusion and Recommendations
McDonald’s is one of the topmost international food-chain restaurants. McDonald’s has attained some benefits through the employment of the franchise and joint venture foreign market entry strategies. These include establishing a broader footprint in China, especially by reaching the third and fourth-tier regions in the country. More so, through the attainment of vast knowledge and resources regarding Chinese consumers, McDonald’s now offers personalized and customized food offerings to the Chinese consumer. This has enabled the company to have a wider reach and a competitive advantage among key players such as KFC and Yam China. McDonald’s sells its food in more than 45% of the Chinese regions through franchise and joint venture strategies. Despite the many benefits accrued to the entry strategies, the company also faces some challenges due to its choices. The selection of the franchise strategy has led to the company not meeting the preferences of the different Chinese groups, which are neither uniform nor homogeneous. Despite the expected advantages of employing the joint venture, McDonald’s still lags behind its vision 2022 plans of having a wider market reach.
Some of the ideal recommendations for McDonald’s would be:
- Having a continuous study of the needs and expectations of Chinese customers in different regions. This would ensure that the company meets the different needs of consumers and therefore claims back its competitive advantage against key food chain restaurants.
- While employing franchise and joint ventures, the company needs to identify the diversity among the different foreign companies it operates. It should also ensure that its offerings are not standardized for all franchises but instead planned according to the needs of the particular region.
References
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