McDonalds Generic and Intensive Growth Strategies
Posted by Aidan Butler on Jan-10-2018
1. Michael Porters Generic Strategies
Porter, generic strategies framework, was introduced by Michael Porter in 1980. The model describes how companies can pursue a competitive advantage by choosing the right strategies. The framework focuses on three main strategies- cost leadership, differentiation and focus. Companies can avail the competitive advantage either by lowering the costs or differentiating their offerings from competitors along the most valued dimensions to justify the premium price. Companies may also gain the competitive edge by either choosing narrow focus strategy through niche marketing, broad focus strategy (by offering products to selected market segments) or industry-wide strategy (by offering products to maximum market segments). The available generic strategic choices differ based on the type and scope of competitive advantage.
2. Application of Michael Porters Generic/Intensive Growth Strategies to McDonalds
McDonalds Company is a multinational firm with high recognition in targeted market segments. The intensifying competition in the industry has made it challenging for McDonalds to sustain the market leadership position and increase market share without exerting significant efforts. The prevailing business environment is compelling McDonalds to obtain a critical advantage over others to stay ahead of the competition. Being a global brand with a strong presence all over the world, McDonalds has set its competitive positioning based on some critical factors that provide a strong edge over rivals including the Competitor in the majority consumer markets. McDonalds’s competitive advantage strategies can be understood in light of Michael Porter’s generic and intensive growth model.
The company has adopted a combination of cost leadership, differentiation and focus strategies to handle the competitive pressure. The customer base expansion and sales growth objectives are obtained by focusing on most appropriate intensive growth strategies based on three generic strategy streams (cost, differentiation and focus). The intensive growth strategies adopted by McDonalds to achieve growth targets include- market penetration, product development, market development and diversification. In this article, a detailed discussion of how McDonalds obtains a competitive advantage by adopting generic and intensive growth strategies is made.
2.1. Streams for Porter’s generic strategies
There are three main streams for Porter’s generic strategies that are used by multinational firms like McDonalds to achieve the growth objectives.
2.1.1. Cost leadership
Cost leadership strategy involves gaining a competitive advantage by lowering the cost. Cost leadership is the main generic strategy that McDonalds uses in various consumer markets.
184.108.40.206 How McDonalds uses a cost leadership strategy?
- The primary objective of using this strategy is to preserve the market leadership position through efficient value chain management.
- This strategy allows McDonalds to expand the market share by targeting the middle class, which makes the largest proportion of overall consumer market mix in most of the countries. Middle class consumers generally place high importance to the pricing factor and cost leadership is the best strategy to cater the needs of this consumer segment.
- McDonalds focuses on affordability and easy accessibility of its produce across the globe, which leads towards high brand awareness and high sales growth and provides a strong competitive advantage basis.
- Other than charging low prices by lowering production cost and maximizing supply chain efficiency, McDonalds frequently offers discounts and coupons to achieve sales targets and handle the competitive pressure by its closest rival. The intended outcome of these discount and promotional campaigns is to increase brand popularity and encourage consumption.
The discussion of McDonalds’s cost leadership strategy has outlined many benefits offered by this generic strategy, such as- gaining quick brand recognition, expanding the customer base, encouraging consumption and achieving sales targets by emphasizing over product’s affordability and accessibility. Although, the analysis of McDonalds McDonalds’s competitive advantage strategies highlight cost leadership as the main strategy, the company also uses the differentiation strategy along with cost leadership to set the basis for sustainable competitive advantage in the intensely competitive global consumer market.
Differentiation is another most commonly used generic strategy to build a competitive advantage. McDonalds uses differentiation in combination with the cost leadership strategy to achieve growth objectives.
220.127.116.11 How McDonalds uses differentiation strategy?
- The adoption of differentiation as a secondary generic strategy allows McDonalds to expand the customer base by emphasizing over the unique product features.
- McDonalds's strategic objective of using this strategy is to differentiate by embedding the innovation and address the consumers’ growing health concerns. For example, McDonalds has extended its product line after studying the consumers’ changing interests to differentiate itself from competitors and expand the scope of opportunities within the industry. The combination of the differentiation and cost leadership has helped McDonalds build a strong and loyal customer base.
- Through differentiation generic strategy, McDonalds positions its product offerings in a way to stand out and be different from the available alternatives. Being the experienced brand with strong foothold, the company uses differentiation as a tool to reduce the pressure by other brands. Heavy investment in marketing, advertisement and celebrity endorsement is made just to differentiate the McDonalds from other brands.
- Extensive experience, the oldest brand and strong presence in all over the world are some differentiation factors that are highlighted in the company's marketing and communication strategies.
- Other than these, the brand logo is also used to set the differentiation basis. The unique and distinctive brand logo has established a strong brand image in consumers’ mind. Although the brand has undergone many revisions, the essence has remained the same, which also serves as a strong differentiating factor.
Moreover, the company offers a wide variety of flavors to match the unique taste needs of consumers. It uses innovation as a tool to offer differentiated augmented services that may delight the customers and increase their preference of McDonalds over other brands.
2.1.3. Focus strategy
Focus is the third generic competitive strategy that encourages companies to concentrate their resources on expanding the narrowly targeted segments. When companies adopt the focus strategy, they serve particular market segments and base their competitive advantage on niche marketing.
18.104.22.168 How McDonalds uses focus strategy?
- McDonalds adopts the focus strategy both in terms of low cost and offering the best value. The low-cost focus strategy is adopted by serving the needs of a niche market segment at the lowest possible price. While, best value focus strategy is adopted by emphasizing over the taste, size and design of the product that could best match the customers’ needs and requirements.
- By focusing on product attributes, McDonalds revises its branding strategies and brings continuous changes in the product designing and packaging to satisfy the customers’ psychological expectations and maximize value for money.
2.2. Intensive Growth Strategies
2.2.1 What are intensive growth strategies?
Intensive growth strategies deal with the development of new products or markets to accomplish corporate growth objectives. The multinational companies like McDonalds consider these strategies to understand how to further penetration into existing markets is possible and how the customer base can be expanded through the market and/or product development. Intensive growth strategies help the firms to grow quickly by actively seeking the product/market expansion opportunities. The unique combination of the three main generic strategy streams- cost, differentiation and focus set the basis for McDonalds’s intensive growth strategies. These growth strategies are depicted into the Ansoff’s product-market expansion grid, which includes four dimensions- market penetration, product development, market development and diversification.
The choice of each growth strategy is dependent on the level of competition, target market characteristics and unique organizational growth objectives.
2.2.2. Aim of McDonalds to use intensive growth strategies
The broad aim of McDonalds when considering these strategies is to maximize the profitability and broaden market share to maintain relevancy and ensure long-term business growth. The effective implementation of these strategies requires the firm to exert the intensive efforts, particularly when management considers them as a source of competitive advantage. This article discusses the four intensive growth strategies of McDonalds to understand the contribution of each growth strategy in achieving the sales growth objectives at the international stage:
22.214.171.124. Market Penetration (Primary Strategy)
What is the market penetration strategy?
Market penetration involves encouraging sales growth within the current customer base. It includes the activities used to increase the market share by focusing on an existing product in the existing market. Market penetration is the primary intensive growth strategy adopted by McDonalds to accomplish the growth objectives.
How McDonalds applies a market penetration strategy?
- Adoption of this strategy requires McDonalds to lower the prices and use different marketing and promotional strategies to push the sales in the existing customer market. The organization offers various price discounts and deals, frequently runs the promotional campaigns and offers the product in new attractive packages to achieve sales growth target while staying in the same market. Aggressive marketing tactics are required when using this strategy in a competitive consumer market.
- McDonalds’s strategic objective associated with market penetration strategy is to increase sales by lowering the prices through cost leadership. A correlation between low cost and low price leadership is assumed in this case. Another way to achieve this growth objective is to integrate the innovation for setting clear differentiation basis. It helps McDonalds in expanding the customer base despite the market becomes saturated. However, it is also important to note that market penetration becomes increasingly costly when a market reaches its saturation point. In that case, investment in different marketing and promotional activities brings a low return, which encourages the company to consider other intensive growth strategies.
- The adoption of market penetration as a primary intensive growth strategy is linked with McDonalds’s ability to differentiate its offerings besides attaining the cost leadership. The combination of cost and differentiation of generic strategies supports this intensive growth strategy. During the initial growth time period, market penetration strategy played an important role in making the McDonalds successful in its home market. Later, recognition at the national level was used to target new markets all over the world. The brand awareness gained through high market penetration was also used as a tool to offer new products to existing and new consumer markets.
Although McDonalds is among the biggest global industry players, market penetration is still the primary intensive growth strategy as the company is currently present in numerous consumer markets with further growth potential.
126.96.36.199 Product Development (Secondary Strategy)
What is the product development strategy?
Product development is the second intensive growth strategy of Ansoff growth matrix. McDonalds uses it as a secondary strategy to achieve growth objectives. This strategy involves the development of new products or modification in the current product lines to make them new to current customer base. Growth-seeking firms like McDonalds adopt this strategy when they found limited growth opportunities in the current market with the current product line. During the last few years, the intensified competition has induced McDonalds to bring new products to targeted market segments. Targeting existing customers with new products requires comparatively less time, resources and efforts as the company leverage the already developed brand awareness and customer loyalty.
How McDonalds applies product development strategy?
- Since its introduction, McDonalds has considerably extended its product line, and its product array has become too broad. It allows the company to hedge the risks as it can compensate the losses incurred from one product line with the gains received from others. Currently, the organization has more than Competitor product brands being served all over the world. Product development is an important tool to attract more customers.
- The strategic objective linked with using this intensive growth strategy is to increase the research and development investments for innovation and new product development. McDonalds’s ability to use the differentiation generic growth strategy supports the product development process and enhances an organization's ability to offer novel or new products to achieve growth in existing consumer markets.
- Cost leadership strategy used by McDonalds also supports this intensive growth strategy as it allows the organization to minimize the costs and use existing infrastructure to launch new products. Although the company can use the same resources to extend the product lines, successful new product development requires McDonalds to emphasize research and development and use new technologies required to pursue this strategy.
- In terms of new product development, three main approaches are available to McDonalds.
- First is to offer new products that share a close association with current product lines.
- Second, to offer new products that resonate the purchase behavior of current customers.
- The third strategy is to develop new products that refresh or reinvent current products. McDonalds manages to successfully introduce new products through on-going assessment of customers' needs.
188.8.131.52. Market Development (Supporting Strategy)
What is a market development strategy?
Market development is the third intensive growth strategy of Ansoff growth matrix. The main objective of this strategy is to explore and enter new markets.
How McDonalds applies market development strategy?
- McDonalds uses market development as a growth strategy that supports market penetration and product development. The organization has extensively applied this strategy, and as a result, it is currently present in more than Competitor countries. The successful entry in new consumer markets has played a key role in making McDonalds a global brand. Main reasons behind the worldwide presence are- affordable prices, strong brand name and flavor. Besides these factors, the successful marketing and celebrity endorsed promotional campaigns have also helped McDonalds in capturing new customers and becoming the market leader in many countries.
- Through on-going investment in research and development, the company continuously expands the distribution network to reach every corner of the world, particularly in developing countries where the presence is currently weak. However, a company is already entered in most of the markets all over the world; market development now only acts as a supporting strategy and has secondary importance.
- The McDonalds’s strategic objective of applying this strategy is to expand the value chain so that it could support the distribution network growth. McDonalds's ability to minimize the costs and attain the cost leadership position allows the organization to apply this intensive growth strategy successfully. The cost minimization supports the additional investment made by the McDonalds to enter in new consumer markets.
- Multinational firms like McDonalds have four ways available to apply this intensive growth strategy- developing new distribution channels, creating new market segments by charging varying prices, developing new product dimensions or considering new geographic areas. The geographic expansion requires substantial resource commitment, and it is also necessary for an organization to evaluate whether current distribution network and other resources support the decision to enter in that particular geographic region. Entry in culturally distant markets is riskier as it requires an organization to be culturally intelligent and built effective knowledge management mechanisms.
- McDonalds understands the importance of understanding culture and integrating local norms and values in marketing campaigns when entering new geographic regions. High cultural intelligence has helped McDonalds gain acceptance in culturally diversified consumer markets. The effective application of this strategy also requires companies to conduct detailed competitor and market intelligence. Well researched operational, financial and market data is needed to make right market entry decisions. However, applying this strategy involves the risk of alienating existing customers.
184.108.40.206. Diversification (Supporting Strategy)
What is diversification strategy?
Diversification is the fourth intensive growth strategy of the Ansoff matrix. This strategy involves entering new markets with new products. The diversification strategy is further divided into related diversification and unrelated diversification.
- As the name depicts, the unrelated diversification is riskier than the related diversification as the firm decides to launch completely new products in new markets with no prior experience.
- While in the case of related diversification, the company's existing knowledge, resources and infrastructure supports the decision to diversify the product portfolio. McDonalds places secondary importance to this strategy as it only supports the growth achieved through market penetration and product development.
How McDonalds uses diversification strategy?
- The McDonalds's portfolio diversification is supported by its cost leadership generic growth strategy as cost minimization ability, and existing infrastructure makes it possible for the organization to explore new product opportunities in new markets.
- The strategic objective linked with diversification intensive growth strategy is to expand the portfolio through effective acquisition strategies. Due to risk factors, the company focuses on the related diversification and avoids risky experiences into unknown regions. Rather, the company utilizes the brand awareness and strength to launch related products in the global drink industry. However, some examples of McDonalds’s unrelated diversification are offering merchandise from fridges, shirts, glasses to pens.
- The related diversification strategy is applied by acquiring profitable businesses after analyzing market trends and changing customer expectations. For example, in response to the growing criticism by environment protection groups, the company attempted to offset the loss from declining sales by investing in green business practices and making business partners with the positive brand image.
- Strategically wise application of the related diversification growth strategy enhances business sustainability and helps the organization achieve long-term growth objectives despite high market turbulence. A well-managed product portfolio with related diversification also offers risk hedging ability as declining trends in some product areas can be balanced by emerging trends in related product areas.
3. Model constraints and limitations
- Porter’s generic strategy model is criticized for its lack of flexibility and specificity.
- Porter also recognized the limitations of his originally introduced three generic strategies and later added three more dimensions to the model for better analysis- access-based, needs-based and variety-based strategies. However, Porter provided no adequate explanation about how these additional dimensions can be integrated into the existing framework, but the only objective was to enhance the specificity of the previous model.
- The model is criticized for its ‘stuck in the middle’ hypothesis. According to this model, if a firm fails to adopt either cost leadership or differentiation strategy, it will lose the competitive edge over rivals. The critics argue that firms have the middle path available to set a competitive advantage. Despite the criticism and limitations, the model has been extensively applied in real-world settings, and multinational firms like McDonalds have used these models to take important strategic decisions.
One major reason behind the success of McDonalds is its ability to choose the right combination of proposed generic and intensive growth strategies based on prevailing competitive and market conditions. Overall, the analysis suggests that risks and costs associated with each intensive growth strategy vary and the firm's choice of each intensive growth strategy is linked with the generic growth strategies.
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