McDonald’s Corporation in India

Organization;

McDonald’s is the world’s leading fast food chain with 31,000 local restaurants in 118 different countries and collectively serving more than 58 million people (www.aboutmcdonalds.com). Due to globalization and internationalization, the corporation established joint ventures, and later franchises, which enabled them to spread into other countries, like India. This turned McDonald’s into a multi-billion dollar enterprise (McDonald’s Annual Report 2008).

Founded in 1937 by brothers Richard and Maurice McDonald, the fast food chain began as a drive-in restaurant in California (Vignali 2001). In 1954, Ray Croc saw an opportunity in the fast food market and initiated a deal with the brothers, giving him rights to franchise McDonald’s in America (Vignali 2001). By 1965, there were over 700 McDonald’s restaurants in the country and in 1967, the corporation went global by opening restaurants in Canada and Puerto Rico (www.aboutmcdonalds.com). Since then, an average of 4.2 new McDonald’s restaurants is opened daily around the world (Hill 2009), one of which included India’s first McDonald’s in Mumbai in 1996 (www.mcdonaldsindia.com).

The American fast food chain is the focus of this report because of its increasing international presence in the world. The literature review covers an overview of the strategies and models that will help better understand McDonald’s move into the Indian market. The discussion and analysis section will focus on McDonald’s in particular and the challenges and competition the corporation faced in this new foreign market. Lastly, the report will conclude with recommendations on how and what McDonald’s can do to better their performance in India.

Literature Review

Globalization refers to the growing interdependent relationships among people from different cultures and nations as physical and psychological walls collapse, barriers to the movement of trade, capital and people are blurred and modern technology is integrated (Daniels et. al. 2009; Hill 2009). This indicates the two main factors that drive globalization are the decline in barriers to the free flow of goods, services and capital, and the change in technology (Daniels et. al. 2009). Internationalization involves customizing business strategies depending on cultural, regional and national differences (Vignali 2001). Since the 20th century, more corporations have become global to create value for their organizations and to achieve competitive advantage. This was followed by the development of multinational enterprises or corporations (Daniels et. al. 2009).

According to Vignali (2001), globalization involves marketing standardized products the same way everywhere, thus viewing the world as a single entity (Vignali 2001). However, the reality is that nations, cultures and people vary around the world. Corporations need more than just globalization to succeed in the international market. According to Taylor (see Vignali 2001), companies should “think global, act local” (Vignali 2001, p.98) by combining internationalization and globalization elements to create a competitive advantage.

Entry Modes

Determining the appropriate entry mode for a corporation is a complex task. Hill, Hwang and Kim (1990) state that different entry modes have different levels of control over foreign operations, in terms of managing operational and strategic decision-making. Some of the common entry modes used by global corporations are franchising and joint ventures (Hill 2009).

Franchising is when a company, or franchisor, sells intangible property, like a trademark, to the franchisee with the stipulation that the franchisee abides the by the rules and conditions specified in the franchising contract (Hill 2009). The rules as to how franchisees operate a restaurant extends to control over the menu, cooking methods, staffing policies, and design and location. This is a common strategy approached by many fast food chains.

By franchising to local people, the delivery and interpretation of something foreign is translated by the local people, in terms of both product and service (Vignali 2001), and the costs of running the business is cheaper. However, franchising may inhibit a corporation taking profits out of one country to support competitive attacks in another country (Hill 2009). Also, the quality of the brand in the foreign country may not be the same or up to par as the quality of the brand of products in the corporation’s native country, which is ultimately bad for business (Hill 2009).

Joint venture is sharing ownership between two or more companies and the percentage of ownership varies from 50% to more or less (Daniels et. al. 2009). It has similar advantages as franchising but can have more problems, such as lack of control of technology (Hill 2009).

When choosing the market it is important to consider long-term economic benefits including the market size, the present wealth of consumers in the market, and the future wealth of the consumers, which depends on the economic growth rate (Hill 2009). Hill (2009) argues the product value in the foreign market is another deciding factor. This depends on if the product is suitable to the market and the local competition.

As they turn global, organizations are transformed in terms of their strategies, operations, management, marketing, and human and material resources and services (Daniels et. al. 2009). This is because foreign markets have different physical, social and competitive factors from the domestic market, and this affects the objectives and the strategy of the corporation (Daniels et. al. 2009).

IR Model

Companies that operate internationally face two forces: pressures for global integration and pressures for local responsiveness (Daniels et. al. 2009). In their research paper, Doz and Prahalad (1984) explain economic, technological and competitive conditions push global integration, whereas diversity in customer needs, distribution channels, media and trade barriers between countries push responsiveness.

Research shows that the higher the pressure for global integration, the greater the need to maximize efficiency through standardization (Daniels et. al 2009). Customers accept standardized products and this reduces costs for the corporation (Daniels et. al 2009). But, international corporations are under pressure to adapt their operations to the local market conditions and local customer demands, as well as adhere to the policies mandated by host-country governments, which varies around the world (Daniels et. al. 2009).

               The integration-responsiveness model, shown in figure 1, was initially developed by Prahalad and Doz in 1987 and then developed further by Bartlett and Ghoshal in 1989. It shows the interaction between global integration and local responsiveness (Daniels et. al. 2009). The IR model presents four strategies to guide how international corporations will enter and compete in the foreign market: international strategy, multidomestic strategy, global strategy and transnational strategy.

               International strategy is adopted by corporations when they want to influence their core competencies by expanding into foreign markets. Secondly, a multidomestic corporation is “locally responsive” (Daniels et. al. 2009, p.475) as it allows each of its operations in foreign countries to act independently. The subsidiaries have the freedom to respond to the preferences of their local customers when designing, making and marketing products (Daniels et. al. 2009). A global strategy maximizes integration and it pushes a company to make a standardized product for a global market, such as shampoo. Lastly, transnational strategy differentiates capabilities and contributions from country to country allowing companies to learn from them. It endorses an integrated framework of technology, financial resources, creative ideas, and people (Daniels et. al. 2009).

Culture

               Hofstede, a key researcher in the subject, defines culture as “the collective programming of the mind which distinguishes the members of one group or category of people from another” (see Hill 2009, p.89). Banerjee (2008) adds it is a set of values, ideas, artefacts, and other meaningful symbols that shape our attitudes and actions. Globalization has given rise to a new concept of “no-border” (Banerjee 2008, p.368) world. Cultures merge, change and evolve as people move around the world; this has increased rapidly due to improved technology, the birth of the internet and expanding networks of interpersonal and mass communications (Craig and Douglas 2006).

As mentioned earlier in this report, corporations become international to create value and gain competitive advantage. One means of doing this is by promoting cultural diversity (Daniels et. al. 2009) as people from diverse backgrounds and experiences are brought together. When divergent cultures come in contact, cultural collision takes place. In adjacent to this theory of cultural collision, Craig, Douglas and Bennett (2009) introduce Americanization, a type of internationalization, which refers to the spread of American culture through US corporations.

Establishing a global platform allows individuals and organizations to interact with each other, regardless of time, space and language. Globalization leads to plenty of opportunities, but it has also gives rise to challenges. Mayo (see Rawwas 2000) found that first-time exporters often fail as they try to expand internationally is because they were unable to understand cultural differences and foreign business practices. Rawwas (2000) concludes that “an enhanced sensitivity to cultural variables is needed” (p.203) for understanding the needs of international customers and making the necessary decisions to meet them.

Discussion and Analysis

               McDonald’s has been operating in India since 1996 and has a total of 160 restaurants nationwide (www.mcdonaldsindia.com). Its strategy is to achieve best value by offering the best quality, while prices are kept reasonable (www.mcdonaldsindia.com). McDonald’s success is attributed to its commitment to deliver quality, service, cleanliness and value to customers, increasing the number of outlets to improve convenience, and finally, its investment in supplier development, training and people (www.mcdonaldsindia.com).

Entry Modes

The growth of the emerging Indian market is attributed to the resurgence in manufacturing sector, growth in service sector, and bigger foreign investments (Sharma and Srinivasan 2008), as well as technological changes, GDP growth, and increase in literacy and income levels (Dana and Vignali 1998). Sharma and Srinivasan (2008) list India’s infrastructure, its economic development, market size, present and future wealth of consumers, and consumer culture as the main attraction for foreign investors.

Hill (2009) and other researchers specify India’s large and relatively prosperous middle class of around 100 million (Harding 2000) was a main attraction for McDonald’s. In addition, Sharma and Srinivasan (2008) state the expectation of India to be one of the top three economies in the world by 2050, along with China and USA also presented ample opportunities for the American corporation. It was a major risk on McDonald’s part as India is the only country where the fast food giant does not include beef in its product, McDonald’s primary raw material (Harding 2000).

In conjunction with Sharma and Srinivasan, Morrison and Beck (2000) add that the costs and risks associated with doing business in India are lower because it is an “economically advanced and politically stable democratic” (Hill 2009, p.489) nation and it is cheaper for McDonald’s to use local raw materials (Morrison and Beck 2000). Prior to its entry into India, the corporation was involved with local suppliers to ensure they were able to generate the right quality and quantity of raw materials required for production. These included potato farms in Gujarat, Trikaya Agriculture for lettuce, Dyanmix Dairy for cheese, and Vista Processed Foods for chicken and vegetables (www.mcdonaldsindia.com). McDonald’s also developed a cold chain network, which keeps raw materials fresh as they are moved from the farms to the restaurants at the lowest possible costs. This unique network benefits the local farmers, while at the same time, gives customers high quality food products that are fresh and of great value (www.mcdonaldsindia.com).

Goyal and Singh (2007) insist that although traditionally, Indians prefer home-cooked meals, there has been a shift in the food consumption patterns due to westernization. Indians were more receptive to international food and eating out at restaurants (Goyal and Singh 2007). According to worldwatch.org (see Goyal and Singh 2007, p.184), India’s fast food industry is growing by 40% each year.

Prior to the entry of international fast food outlets, Goyal and Singh (2007) reveal that Nirula’s was a popular domestic fast food provider. The British Wimpy’s was the first international fast food chain to enter the Indian market in 1984 and were an instant success. Except for Wimpy’s and later KFC, India was not home to many fast food outlets in the mid-1990’s, and the McDonald’s Corporation felt they could give something extra to the Indian customers (Goyal and Singh 2007).

McDonald’s entry into India was initially done through joint-venture companies: M.D. Hardcastle Restaurants Pvt. Ltd. heads up the restaurants in west and south India, while those in the north and east are managed by Connaught Plaza Restaurant Pvt. Ltd. (www.mcdonaldsindia.com). However, this is unlike Vignali (2001) and Hill (2009) who indicate that McDonald’s growth and international success is attributed to using the “franchising strategy” (Hill 2009, p.498). McDonald’s allows local firms in India to use its brand name as long as they stick to the franchising contract. They also organize the supply chain for its franchisees and provide management training and financial assistance (Hill 2009).

As mentioned in the literature review, maintaining the expected quality of McDonald’s products throughout its outlets in India is a challenge (Hill 2009). One way in which they handle this is by establishing a “master franchisee” (Hill 2009, p.498). This is where the joint venture McDonald’s has established with the two local firms is crucial. The managers of the firms, who have been trained at McDonald’s Hamburger University in America, head up the two master franchisee and oversee the operations in all McDonald’s outlets in India (www.mcdonaldsindia.com; Hill 2009). It can be argued that the American fast food giant initially entered the Indian market through joint-ventures, but then later spread all over the country through franchises.

Hill (2009) continues that, through joint ventures and franchising, McDonald’s benefits from the local partner’s knowledge of the country’s competitive conditions, culture, and language, and the corporation is also relieved of the costs and risks of opening in the foreign market on their own; instead, the franchisee assumes all the responsibilities. By using this strategy, McDonald’s was able to expand rapidly at a relatively low cost and risk (Hill 2009).

IR Model

McDonald’s adopted the international strategy through franchising to push their core competencies in the Indian market and to customize their products and services to the local customer demands (Hill 2009). This way the corporation relies on local subsidiaries in India to stick to the regulations of running McDonald’s and ensure the standardizing of its products and services (Daniels et. al. 2009). However, the Indian market is culturally diverse, so complete standardization within an international scale is impossible. Dana and Vignali (1998) argue that standardization is cheaper, but “success is often a function of being able to adapt to an environment” (p.50). McDonald’s standardizes as much as possible to reduce costs, but they are aware of cultural differences and have adopted the concept of “think global, act local” (Vignali 2001, p.99).

According to Hill (2009), international strategy provides the subsidiaries with some freedom, but the primary control resides with managers at the headquarters in America. Multidomestic strategy, on the other hand, allows McDonald’s in India to act independently from its counterparts in America. The Indian subsidiaries are granted the authority to design, make and market new products that directly respond to the local customers’ preferences (Hill 2009).

McDonald’s does not use beef because the cow is worshipped by the local Hindu population. In fact, possession of beef could result in five years jail time (Dana and Vignali 1998). Thus, the corporation completely removed beef from all its products, as well as pork for the Muslims (Harding 2001). Instead of the ever-popular Big Macs found in the west, McDonald’s in India serves Maharaja Macs made from mutton, spicy vegetarian rice patties (Morrison and Beck 2000), chicken burgers, vegetarian McAloo Tikki burgers, containing potatoes, and vegetarian pizza puffs – all designed to draw in the Indian middle-class (Harding 2001; Vignali 2001).

Customers in India have different preferences due to cultural and religious differences, so McDonald’s is required to modify and adapt their products and services as according to the local demand. Therefore, as indicated in figure 2, McDonald’s strategy is positioned between the international and multidomestic quadrant.

Culture

Craig, Douglas and Bennett (2009) state in their article that as that the opening on McDonald’s in India is a reflection of the American culture spreading. The Indian public have mixed feelings about the company’s presence in the country. Usually, the younger generation, particularly, the college-going crowd and high school students from the middle-class enjoy the new taste. However, many of them argue that McDonald’s food is “bad…expensive…un-Indian” (Harding 2001).

Food ingredients are not the only things McDonald’s had to modify. They learned the hard way to be aware of the religious belief and value of Hindus, Jains, Muslims and Christians in the country and adapt to each. Dana and Vignali (1998) recount an incident in the late 1990’s that arose when McDonald’s printed two million bags illustrating the flags of 24 competitors of a football championship. The problem was that the Saudi Arabia’s flag contained the religious words: “There is no God but Allah, and Mohammad is his prophet” (Dana and Vignali 1998, p.50). This angered the large Hindu population in the country and caused a scandal, affecting McDonald’s reputation.

Competition

McDonald’s key competitor is KFC, another American fast food giant. KFC entered the Indian market a year before McDonald’s and there were problems from the start. The corporation would fatten its chicken on maize, but this was also a source of nutrition for the poor in India. They were getting less and less maize and could not even afford to eat at KFC (Dana and Vignali 1998). The Karnataka Farmers Association went on riots to demonstrate their protest and anger at the corporation, and it eventually culminated with KFC losing their permit in the southern state (Dana and Vignali 1998). KFC restaurants in India are limited and many of them have faced issues, such as “unsanitary conditions” (Dana and Vignali 1998, p.51).

               Another competitor in India for McDonald’s is the British fast food chain, Wimpy’s (Dana 1999). They are the only international fast food conglomerate who has been in India the longest. Their growth has been slowed down over the years due to the number of international fast food chains entering India, but they frequently expand and reinvent their menus with Indian dishes to attract Indian customers (Goyal and Singh 2007).

Although McDonald’s has done comparatively better than KFC in India, the former faced plenty of challenges too. In the following section, recommendations are given on how McDonald’s can improve their performance in subcontinent.

Recommendations and Conclusion

               Early 2000, McDonald’s faced a lot of problems and the local population were dissatisfied with the corporation’s presence in the country. The problems stemmed from the corporations lack of understanding about cultural and religious beliefs in India. This shows a sign of lack of faith and lack of trust, particularly after rumours of beef fat in cooking oil used by the French McDonald’s (Harding 2001) set of angry protests in India. Delhi’s managing director for McDonald’s insists the outlets in India do not use beef extracts, but since the McDonald’s empire was built on beef products, some Indians find it hard to believe that the local outlets do not use beef extracts (Harding 2001).

               It is a delicate situation and a hard problem to solve when religion and cultural beliefs are involved. The best thing McDonald’s can do to keep business flowing in India is by building up consumer trust in the Indian market. By establishing a strategic alliance between domestic competitors, like Nirula’s, customers might be influenced into eating at McDonald’s (Hill 2009). This collaboration would encourage McDonald’s to develop more Indian-friendly products, like curries, that fit the tastes of the local demand, and it might present the American corporation in a more favourable light.

McDonald’s is a popular fast food chain found all over the world. Entering into the Indian market was a brave move and it set new challenges for the corporation due to cultural, religious and ethical differences in the country. McDonald’s are still facing problems, but for the most part they have managed to attract a part of the Indian population, fascinated by this western culture. In conclusion, despite the blurring of the physical boundaries between India and America, cultural factors still affect Indian customer’s buying habits (Banerjee 2008) and McDonald’s need to focus on gaining the trust of their local customers, or they will be unsuccessful like their fellow-American competitors, KFC.

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