Strategic Management

McDonalds
RUSSIA

Rinu Varghese

Introduction and Strategic Profile of the Firm

McDonalds

McDonalds is the worlds largest chain of fast-food restaurants.

The company primarily franchises and operates McDonalds restaurants

in the food service industry.

The present corporation dates its founding to the opening of a franchised

restaurant by Ray Kroc on April 15, 1955.

By developing a sophisticated operating and delivery system, there were

more than 200 McDonalds outlets across the country by 1960, a rapid
expansion fueled by low franchising fees.

Fast Food Industry

The fast food industry emerged in America in the 1920s .

The industrial growth and a speedily developing automobile industry gave

people no opportunity for cooking at home .

Americans now spend more money on fast food than they do on higher
education, personal computers, software or new cars .

In the United states alone, customers spent about US$142 billion on fast
food in 2006 (which increased from US$6 billion in 1970) .

Overview of McDonalds Strategies

McDonalds is growing at the rate of between 1000 and 1500 restaurants a

year and by five to ten new countries a year. Today it has about 23000
restaurants worldwide .

McDonalds spends more money on advertising and marketing than does

any other brand, much of it targeted at children.

They are focusing on new innovative modifications to their menu

depending upon the regions culture, customs, and traditions.

Maintaining an extensive advertising campaign by TV, Radio, and

newspaper.

company makes significant use of billboards and signage, sponsors

sporting events from ranging from Little League to the Olympic Games.

Russia Federation

History

History of Russia begins with that

of the East Slavs.

Adopted Christianity from the

Byzantine Empire in 988.

After the 13th century, Moscow

gradually came to dominate the
former cultural center.

By the 18th century, the Grand

Duchy of Moscow had become the
huge Russian Empire.

The collapse of the Soviet Union

in late 1991.

Geography

Russia is the world's largest

country.
Population: 149 million
Geographic size: 6.6 million square
miles.
Capital: Moscow
Major cities and population:
Moscow, Saint Petersburg
Three quarters of the Russian
population lives in the cities and
towns of western Russia
About 25% of the population still
live in rural areas

Society and Culture

Russian culture has a long history and tradition

and Russians are very proud of it.
Russians consider themselves as a well educated
nation.
They read a lot, books are cheap, and every one
can afford to buy 5-10 books a month without
serious damage to a family budget.
Russians are also big fan of live performances at
theatres.
They enjoy attending theatres: opera, musical,
ballet, drama etc.
There was no private property until Perestroika,
everything used to belong to the state
During Soviet times there was a well developed
system of community work.
People that were doing community work were
given benefits (free or discounted travel, ability
to buy deficit goods.)
The majority of Russians consider themselves as
Christians

Demography

Russia's area is about 17 million square

kilometers .

Its population density is about 9 persons

per square kilometer (22 per sq. mi.),
making it one of the most sparsely
populated countries in the world. Its
population is predominantly urban.

2006, Russia's population of 142,300,000

Population structure

0-14 years: 14.2%

15-64 years: 71.3%
65 years and over: 14.4% (2006 est.)

Infant mortality rate: 15.13 deaths/1,000 live births (2006 est.)

Life expectancy at birth:

total population: 67.08 years
male: 60.45 years
female: 74.1 years (2006 est.)

Ethnic groups

3.83% Tatars (5,554,601)

2.03% Ukrainians (2,942,961)

1.15% Bashkir's (1,673,389)

1.13% Chuvash's (1,637,094)

0.94% Chechens (1,360,253)

0.78% Armenians (1,130,491)

Political System an Condition

Federal Presidential Republic, where by the President of Russia is the Head

of state and the Prime Minister of Russia is the Head of Government.
Executive Power is exercised by the government.
Legislative power is vested in both the government and the two chambers
of the Federal Assembly of the Russian Federation.
After collapse of the Soviet Union at the end of 1991, Russia has faced
serious challenges in its efforts to forge a political system.
October 1993,when President Boris Yeltsin used military force to dissolve
the parliament and called for new legislative elections.
Russia has faced serious challenges in its efforts to forge a political system
to follow nearly seventy-five years of Soviet rule.
For instance leading figures in the legislative and executive branches have
put forth opposing views of Russia's political direction

Ecological Profile

The ecological issues have been neglected in Russia since 1995.

recently the situation has deteriorated

Union of Greens according to their calculations, "some 300,000 or

350,000 people a year die in Russia because of the unfavorable
environmental situation.

Many people believe that ecology is just for rich countries and Russia will
deal with it when it is rich.

Russia is not on the brink of an ecological catastrophe, it is already

developing in Russia.

Energy Profile

Russia is a major world oil producer, some times producing even more than
Saudi Arabia.
According to the Oil and Gas Journal, Russia has proven oil reserves of 60
billion barrels.
Russia has the largest natural gas reserves in the world, but the countrys
aging natural gas infrastructure,
Russia holds the worlds largest natural gas reserves, with 1,680 trillion
cubic feet (Tcf).
Russia has the second-largest amount of recoverable coal reserves in the
world.
Russia's power sector includes over 440 thermal and hydropower plants
(approximately 77 of which are coal-fired) plus 31 nuclear reactors.
Russia has 41 oil refineries with a total crude oil processing capacity of 5.4
million bbl.
Russias economy is heavily dependent on oil and natural gas exports,
making it vulnerable to fluctuations in world oil prices. According to an
International Monetary Fund (IMF) study , a $1 per barrel increase in Urals
blend oil prices for a year is estimated to raise federal budget revenues by
0.35 percent of GDP.

Energy Overview

Proven Oil Reserves (January 1, 2007E) 60 billion barrels.

Oil Production (2006E) 9,674 thousand barrels per day, of which 96% was crude oil.

Oil Consumption (2005E) 2,854 thousand barrels per day.

Crude Oil Distillation Capacity (2007E) 5,339 thousand barrels per day.

Proven Natural Gas Reserves (January 1, 2007E) 1,680 trillion cubic feet.

Natural Gas Production (2004E), (2005E) 22.4 trillion cubic feet (tcf), 22.7 tcf.
Natural Gas Consumption (2004E), (2004E) 16.0 Trillion cubic feet (tcf).
Recoverable Coal Reserves (2003E) 173,073.9 million short tons.
Coal Production (2004E) 308.9 million short tons.
Coal Consumption (2004E) 257.5 million short tons.
Electricity Installed Capacity (2004E) 215.3 gig watts.
Electricity Production (2004E) 881.6 billion kilowatt hours.
Electricity Consumption (2004E) 804 billion kilowatt hours.
Total Energy Consumption (2004E) 30.1 quadrillion Btus, of which Natural Gas
(55%), Oil (19%), Coal (16%), Hydroelectricity (6%), Nuclear (5%), Other
Renewable (0%)
Total Per Capita Energy Consumption (2004E) 208.8 million Btus.
Energy Intensity (2004E) 15,763 Btu per $2000-PPP

Russia Armed Forces

Currently, the military is in the middle of a

major equipment upgrade, with the government
in the process of spending about $200 billion

Active troops. 1,037,000 (Ranked 5th)

China, USA, India, N.Koria

Total troops. 3,796,100.

Military expenditures

$32 billion USD (2007) Russian Military

spending.

Air Force And Navy

It is claimed to be the greatest air force in the

world in terms of military power, along with the
U.S. Air Force
The Russian Air Force has a strength of 2400
combat aircraft and a total of 3365 aircraft.
Russia Has World Fast, Largest military
transport, Operative fighter, Largest and Faster
Bomber, Faster Multi Engine, Largest
Helicopter, Faster Attack Helicopter
The Russian Navy possesses most of the former
Soviet naval forces
35,000 personnel with around 270 combat
aircraft in 2006.

Geopolitics

Latvia and Estonia dare to have territorial claims against Russia .

Russia should divide that unsustainable country with China, there by

stimulating Chinas geopolitical interests in expanding further to the west.

Also demand the return of primordial Russian lands in northeastern

Kazakhstan.

Economy

More than a decade after the collapse of the Soviet Union in 1991, Russia is
trying to further develop a market economy and achieve much more
consistent economic growth.
Russia ended 2006 with its eighth straight year of growth, averaging 6.7%
annually
Although high oil prices and a relatively cheap ruble initially drove this
growth, since 2003 consumer demand and, more recently, investment have
played a significant role.
Russia's 2006 GDP was $1.723 trillion (est. PPP), the 9th highest in the
world.
Oil, natural gas, metals, and timber account for more than 80% of exports
Oil and gas contribute to 5.7% of GDP
Russia has the largest known natural gas reserves of any state on Earth,
along with the second largest coal reserves, and the eighth largest oil
reserves.

It is the world's leading natural gas exporter and the second leading oil
exporter

In January-June 2007, foreign investment in the Russian economy doubled

year-on-year reaching $60.3 billion

In 2000 total investment in fixed assets was $40 billion, giving growth of
300% by 2006.

Russia has a flat income tax rate of 13 percent, one of the lowest rates in the
world

The federal budget has run surpluses since 2001 and ended 2006 with a
surplus of 9% of GDP

Economic Policy

Despite restrictions on foreign investment, an improving overall business

environment has led to increased inflows of foreign direct investment
(FDI).
Foreign Trade Impact. Foreign trade has a huge part (70%) in GDP of
Russia.
Protection of Foreign Currency Earning Enterprises
International Security Agreements.
improving the taxation system.
Russia's entry into the World Trade Organization (WTO), which is likely in
2008.
protection of intellectual property rights.
modernization of customs, transport and trade facilitation, enhanced
domestic competition especially in utilities, improvements in the area of
product standards, rules for public procurement, and judicial reform.

Business Sector and business companies

Gazprom (Gas Company could grow into the world's largest company in
terms of capitalization, capitalization totals roughly $300 billion.

Vneshstrojimport. Russia's leading construction management company,

Over 3000 projects of more than $ 26 billion value have been implemented.

RekSoft.Outsourcing professionals rank Reksoft among 30 leading

offshore outsourcing services companies in The Top Off shoring Providers
by IAOP.

Response to Globalization

wide range of papers and data relevant to trade and foreign direct
investment policy and WTO accession are presented.
Open door foreign companies for business in Country.
Commitments to foreign investors in several business services sectors can
be considerably improved
Invest in other country, such as India, Iran and others.
Joint venture start with many sector.
Become members (observer) other world and trade organization, ASAN,
ARAB League

Industry Analysis

McDonalds competitive advantage over

rivals

Being their own boss

All franchisee agrees to operate the restaurant in accordance with
McDonald's standards of quality, service, cleanliness and value .
Selling a well established, high quality product
Product standardization.
No expensive market research
Intensive initial training
Training for 9 months
Leadership qualities, business management, team building.
Stock control and ordering, profit and loss accounts and the legal side of
hiring and employing staff
Continuous support
Success and profitability of McDonald's is inextricably linked to the success
of all the franchises.

National marketing:
McDonald's trademark, the Golden Arches-most instantly recognized symbol
in the world.

Huge Benefits from national marketing carried out by McDonald's .

Radio and press advertisements ,television and promotional activities are

used to get specific messages across emphasizing the quality of product
ingredients.

All franchisees benefit from national marketing .

McDonalds in Russia
http://www.robertamsterdam.com/2007/10/video_mcdonalds_boo
ming_in_rus.htm
http://video.msn.com/video.aspx?mkt=en-us&vid=824bcc345efe-4860-aecc-96e5351c0b77

Competitor analysis
Food market in Russia
1.Moscows fast food market is estimated at between $ 400700 million per year, with per annum growth of
perhaps 20 percent.
2.Reasons to start business in Russia:
a.
The rapid expansion of shopping malls creates new
real estate for fast food
b.
Russias broad-based, young, not-so-picky crowd.
3. According to recent market research, half of men and
women between 16-50 buy fast food at least once a
week.
64% considers location
54% considers cost important,
while fewer regard quality (43%) and cleanliness (25%) as
important factors

McDonald's
McDonald's franchises operates more than 32,000 fast-food restaurants in
over 100 countries.
Europe
$7,072 (35%)

United States

$6,955 (34%)

Australia/Asia-Pacific

$2,815 (14%)

Latin America

$1,327 (6%)

Canada

$948 (5%)

Other

$1,343 (6%)

Competitor analysis

Baskin Robbins And Marcon small competitors

Rostik Group and Yum brands

Baskin Robbins is one of Russias largest franchises.

Combining the western brand name and the quality assurance of a local
factory in Russia to develop their products
Franchises such as Pizza Hut, Sbarros, and Subway all have smaller
presences and have faced more problems in the market.

Rostiks (Russia's KFC)

Market leader in drive-through restaurants.
Rostik owns all of the 100 Rostiks restaurants.
It will invest up to $100 million in the expansion over the next five years .
turnover of $200 million a year.
Rostik's provides franchise support services to both KFC and Rostik's
restaurants in Russia and the CIS

Yum brands

Yum! Brands is the world's largest restaurant company in terms of system

restaurants with over 34,000 restaurants in more than 100 countries and
territories. Four of the company's restaurant brands -- KFC, Pizza Hut,
Taco Bell and Long John Silver's -- are the global leaders of the chicken,
pizza, Mexican-style food and quick-service seafood categories
respectively.
Yum! Brands is the worldwide leader in multibranding, which offers
consumers more choice and convenience at one restaurant
U.S. fast-food giant Yum! Brands is throwing the weight of its KFC brand
behind local fried chicken chain Rostiks in a deal aimed at opening 300
joint outlets in Russia and the CIS over the next five years.
Under the parties' agreements, RRL will retain day-to-day operational
management of its restaurants, while Yum! Brands will provide strategic
support through its experience and technologies in managing international
quick-service brands.

SWOT ANALYSIS

STRENGTHS

Brand recognition:
McDonalds is the most well know fast food chain in the world, brand
recognition is there biggest strength. Their marketing campaign continues
to focus on brand recognition.
Innovative leaders:
McDonalds success is its willingness to innovate, even while striving to
achieve consistency in the operation of its many outlets. For example, its
breakfast menu, salads, Chicken McNuggets, and the McLean Deluxe
sandwich, and addition of cabbage pie along with other traditional Russian
food items .

Convenience:
The company has also made convenience its watchword, not
only through how fast it serves customers, but also in the
location of its outlets .Freestanding restaurants are positioned
so that you are never more than a few minutes away by foot in
the city or by car in the suburbs. Plus McDonalds is tucking
restaurants into schools, stores etc.
Customers:
The store serves 30,000 customers a day, as busy as on
opening day, January 31,1990. McDonald's has served more
than 1 billion customers and more than 132 million Big Macs.
The Push kin Square restaurant is important because it is the
jewel in a growing real estate empire that ranks McDonald's
among the largest corporate landowners in Russia.
Currently, 127 McDonald's restaurants are open in 37 Russian
cities. The chain now employs 17,000 Russians in 37 cities

Weakness
Negative image:
Their biggest weakness is the negative image of their food. Their food
doesnt have a good public image. Key to its future success will be
maintaining its core strengthsan unwavering focus on quality
Profits and stock prices:
In 1990s, the company was fixated on adding 2500 stores. But by 2000,
the condition of its existing locations, as well as the appeal of certain
menu items, deteriorated.
The company's flawed expansion strategy was hammering its profits and
stock price.
Production problem:
There was no manufacturer or producer in Russia who could produce
products needed for the business. One of the solutions was to bring all the
products from different countries, but that would be too expensive.

Technology problem:
Despite its status as a Super- Power, Russia was far behind United States
and Canadian technological development. All the equipment for the
restaurant had to be brought from outside of the country, even the
equipment for the food processing plant
Political problem:
They had to introduce their restaurant not as a Capitalism intruder, but as a
business that will serve peoples needs when they are in hurry.

Opportunities

McDonalds expansion:
Russia ranks second out of all McDonald's' markets for the average number of consumers per restaurant.
McDonalds will spend up to $50m to expand its chain in Russia .
McDonalds international operations -huge opportunity
International operations account for 60% of McDonalds profits
80 % of new units are expected to grow at 4 times the rate of its business in the United States

Expand local supplier base:

McDonald's has continued to expand its local supplier base.
75% of raw ingredients needed for McDonald's in Russia Restaurants are purchased from more than
130 independent Russian suppliers who have created more than 80,000 jobs in their companies and
who follow McDonald's strictly controlled quality standards in their food processing operations.

Growing dining-out market

McDonalds sees the decline in fast-food dining .
Turn threat into opportunity.
It will devote 20% of its marketing budget to persuade Russian
consumers to have breakfast in its restaurants.
The chain now serves over 10 million customers a day in Europe, which
contributes 36 percent to the company's operating income, making it the
chain's second most profitable region after the United State

Russian foodservice development:

McDonald's has made significant contributions to the development of
Russia's foodservice and processing industries, agriculture and business
practices.

Threats
Saturation:
The key threats to McDonalds domestically are the lack of growth opportunities.
The market is well saturated, and it would difficult to achieve double-digit
growth.
Healthier eating:

Fast foods increases the incidence of cancer, heart disease, and diabetes
among the population.

Doctors have established that McDonalds salads are even more unhealthy
than its hamburgers. McDonalds Caesar salad contains 18.4 g of fat while a
standard cheeseburger contains just 11.5 g of fat. It is highly likely that the
salad dressing is too fat and high-calorie.
Ubiquity:
McDonalds are everywhere, the dining experience is never special . And as
Baby Boomers age and become more affluent, it is likely that they will leave
behind their fast-food ways, if only to step up to moderately priced restaurants
as they have an added advantage of serving higher-margin alcoholic drinks,

Porter analysis
Threat of substitutes

Diverse
substitute products may include products purchased from the local grocery store,
food from sit-down restaurants, or delivery foods such as pizza.

Availability:
The primary issue with these substitute products is that they are readily available
to the customer and the customer tends to view them as being comparable or better
in terms of the quality of fast-food products.

Health:
Another issue that faces the fast-food industry is the availability of products that
cater to the health-conscious lifestyle. The majority of the public tends to view
fast-food restaurants as primarily serving foods that are high in fat content and
unhealthy and as a result they are likely to look elsewhere for a healthy food

Strongest and closest substitutes:

KENTUCKY FRIED CHICKEN: Equally sizeable market share,
competitiveness in the pricing structure , new and changed recipe in the
market , emphasis on maintenance of quality and standard of service

DRAWBACKS:
MCDONALDS COMPETITIVE ADVANTAGE:
McDonalds offers both beef and chicken products as part of its wide range
of delicacies, KFC has limited its range to offer products made from
chicken only.

Threat of new entrants:

The threat of potential new entrants is low
Companys brands :
High customer loyalty towards a companys brands, which is true for the
differentiation strategy, can n play a vital role in discouraging potential
entrants
Large capital:
In order to compete on a large scale, it will require a great deal of capital to
invest in real estate and build physical restaurant locations. In addition,
the market is already so saturated that the new competitor might find it
difficult to establish a customer base and become profitable.
Bargaining power of suppliers

is not a significant competitive force in the fast-food industry

Purchase from many sources:
Since the fast-food firms divide their purchases among a diverse array of
suppliers, the suppliers tend to have little or no bargaining power or
leverage since there are multiple suppliers for the same products

Suppliers
Raw ingredients needed for McDonald's Russian restaurants are purchased
from more than 100 independent Russian and C.I.S suppliers who
follow McDonald's strictly controlled quality standards in their food
processing operations.
"Pensensky Myasopticekombinat is a supplier of high quality
beef for McDonalds in Russia.

Threat of intense rivalry

High
Rivalry within the industry is intense
Dominated by price wars led by ROSTIKS, Yum Brands KFC
Kroshka Kartoshka,Marcon are the other fast food restaurants in Russia
McDonald still the leader:
Industry has not yet reached perfect competition where competitors are
numerous and relatively of the same size. As long as the firms continue to
have differentiated offerings, they maintain their ability to set prices.
Bargaining power of buyers:
High Cost leaders-low price strategy:
Cost leaders have the unique ability to offer lower price options to large
and powerful buyers..
Leveraging power:
Fast-food industry has begun to focus on the needs of the customer. The
buyer has a great deal of leveraging power due to the fact that if they are
dissatisfied with one brand they can easily switch or purchase from an
alternate brand with little or no monetary repercussions.
McDonalds have implemented strategies to improve the quality of customer
service and the cleanliness of the restaurant locations in order to please their
customers in hopes that they will become a repeat customer.

Country Specific
International Strategy
Formulation

Corporate Level Strategy

McDonald's Corporate level strategy aligns with the country specific

objective

Management practices decide how to govern through direct corporate

interventions

Competitive contact is to be localized

The company should be able to reach its customers defining the issues of
corporate responsibilities

Business Level Strategy

Strategic issues are both practical coordination of operating units and

developing and sustaining a competitive advantage for the products and
services that are produced

Organizations compete for a wide customer base on price.

Reconfiguration of value chain as needed

Product differentiation offering lower prices as compared to our

competitors

Introducing integrated low cost and differentiation strategy

Entry Modes

Strategic Alliance

Acquisitions

Greenfield Venture

Country Specific International

Strategy Implementation

Organizational Structure

World Wide Structure: Making money from franchisees food

sales

Increasing the number of restaurants by a larger margin,

mainly due to the rise in demand of hamburgers

The structure of McDonalds in Russia is based on trust

Recommendations

Corporate Level Strategy: Reach target of 125 franchise restaurants every

year
Decentralization
Open Regional offices in Moscow and St. Petersburg
Business Level Strategy: Open more restaurants in the mall since the
volume of malls in Russia are big
Introduce diet food in order to maintain the customers diet conscious roles
Entry Mode: The coffee drinkers in Russia are increasing by 15% every
year, hence its good time to jump into a joint venture with one of the
coffee companies in Russia.

Thank you
Questions and Answers