McDonald’s Five Forces Analysis (Porter’s Model) & Recommendations - Panmore Institute (2022)

McDonald’s Five Forces Analysis (Porter’s Model) & Recommendations - Panmore Institute (1)

McDonald’s Corporation’s strategies for international expansion account for the external factors in the industry environment, as identified in this Five Forces analysis of the business. Michael E. Porter’s Five Forces analysis model provides valuable information to support strategic management, especially in addressing relevant issues in the external environment of the food service business. These issues are based on factors external to McDonald’s, representing the degree of competitive rivalry in the industry, the bargaining power of customers or buyers, the bargaining power of suppliers, the threat of substitution, and the threat of new entrants. In this Five Forces analysis of McDonald’s, the forces are mainly within the fast-food restaurant industry, although the company also sells McCafé coffee products for home use and other consumer goods. As the leading restaurant chain business in the world, the company is an example of effective strategic management, especially in dealing with competition in different markets worldwide. This status shows that McDonald’s strategic direction is appropriate to the external factors identified in this Five Forces analysis.

In addressing the external factors determined in this Five Forces analysis, McDonald’s Corporation ensures that its strategies are appropriate to combat external forces. The company faces pressure from various competitors, including large multinational businesses and small local restaurants. McDonald’s Corporation’s generic strategy and intensive growth strategies satisfy business needs in competing against such firms as Burger King, Wendy’s, Subway, and Dunkin’, as well as other food and beverage businesses like Starbucks Coffee Company.

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Overview – Porter’s Five Forces Analysis of McDonald’s Corporation

Summary. In this Five Forces analysis, McDonald’s faces the effects of external factors at varying intensities, based on the variations among markets around the world. For example, the U.S. fast-food market presents a competitive landscape different from that of the European fast-food market. The restaurant chain company implements strategies to meet these external factors and minimize their negative impacts. Considering the combination of market conditions, this Porter’s Five Forces analysis of McDonald’s establishes the following intensities of the five forces:

  1. Strong competitive rivalry or competition
  2. Strong bargaining power of buyers or customers
  3. Weak bargaining power of suppliers
  4. Strong threat of substitutes or substitution
  5. Moderate threat of new entrants or new entry

Recommendations. This Five Forces analysis shows that McDonald’s Corporation needs to prioritize the strategic issues related to competition, consumers, and substitutes, all of which exert a strong force on the company and its external environment. The other forces (bargaining power of suppliers and threat of new entrants) are also significant to the food service business, although to a lower extent. In this regard, a recommendation is to strengthen the business by building on the strengths enumerated in the SWOT analysis of McDonald’s Corporation. The fast-food company’s managers must focus on reducing the effects of competitors and substitutes on revenues and market share. McDonald’s marketing mix or 4Ps partly supports such effort. Also, it is recommended that McDonald’s make its product innovation process more aggressive. While the food service industry is saturated with aggressive firms, new products can attract new customers and retain more customers. In relation, based on this Porter’s Five Forces analysis, McDonald’s can implement higher quality standards to address the forces of competition and substitution.

Competitive Rivalry or Competition with McDonald’s (Strong Force)

McDonald’s experiences tough competition because the fast-food restaurant market is saturated. This element of the Porter’s Five Forces analysis model tackles the effects of competing firms in the food service industry environment. In McDonald’s case, the strong force of competitive rivalry is based on the following external factors:

  • High number of food service firms – Strong Force
  • High aggressiveness of firms – Strong Force
  • Low switching costs between restaurants – Strong Force

The industry has many firms of various sizes, such as global chains like McDonald’s and local mom-and-pop fast-food restaurants. This external factor strengthens the force of rivalry in the fast-food restaurant industry. Also, the Five Forces analysis model considers firm aggressiveness a factor that influences competition against McDonald’s. In this business case, most medium and large firms aggressively market their food and beverage products. This external factor increases the intensity of competitive rivalry with McDonald’s Corporation. In addition, low switching costs are an external factor that makes it easy for consumers to transfer to other restaurants, such as Wendy’s and Burger King, thereby adding to the force of competition. Thus, this element of the Five Forces analysis of McDonald’s shows that competition is among the most significant external forces for consideration in the strategic management of the business.

Bargaining Power of McDonald’s Customers/Buyers (Strong Force)

McDonald’s market strategies address the power of customers in influencing business performance. This element of the Five Forces analysis deals with the leverage of consumers, and how their decisions impact food service businesses. In McDonald’s case, the following are the external factors that contribute to the strong bargaining power of buyers:

  • Low switching costs – Strong Force
  • Large number of food and beverage providers – Strong Force
  • High availability of substitutes – Strong Force

The ease of changing from one restaurant to another (low switching costs) enables consumers to easily influence McDonald’s business performance. In the Five Forces analysis framework, this external factor strengthens the bargaining power of customers relative to the influence of food service firms on the market. In relation, because of market saturation, consumers can choose from many fast-food restaurants other than McDonald’s. This condition makes the bargaining power of buyers a strong force that affects the fast-food company’s external environment. Moreover, the availability of food and beverage substitutes is relevant in this external analysis, adding to the bargaining power of customers. For example, substitutes include food kiosks and outlets, artisanal bakeries, microwave meals, and foods that consumers can cook at home. Based on this element of Porter’s Five Forces analysis, business strategies must increase customer loyalty, especially when the identified external factors combine with sociocultural trends like consumers’ increasing preference for healthy lifestyles, as outlined in the PESTEL/PESTLE analysis of McDonald’s Corporation.

Bargaining Power of McDonald’s Suppliers (Weak Force)

Suppliers influence McDonald’s in terms of the company’s production capacity based on the availability of materials. This element of the Five Forces analysis model shows the impact of suppliers on firms and the fast-food restaurant industry environment. In McDonald’s case, the weak bargaining power of suppliers is based on the following external factors:

  • Large number of suppliers – Weak Force
  • Low forward vertical integration of suppliers – Weak Force
  • High overall supply for food service businesses – Weak Force

The large population of suppliers weakens the effect of individual suppliers on McDonald’s Corporation. This weakness is partly based on the lack of strong regional and global alliances among food and beverage suppliers. In relation, most of McDonald’s suppliers are not vertically integrated. This means that they do not control the distribution network that transports their products to fast-food restaurant firms. In Porter’s Five Forces analysis model, low vertical integration weakens the bargaining power of suppliers against McDonald’s Corporation. Also, the relative abundance of materials like flour and meat reduces individual suppliers’ influence on the company. Thus, this element of the Five Forces analysis shows that external factors combine to make supplier power weak and a minor issue in restaurant firms’ strategic management. Still, McDonald’s corporate social responsibility strategy and stakeholder management approaches help in addressing this force coming from suppliers.

Threat of Substitutes or Substitution (Strong Force)

Substitutes are a significant concern for McDonald’s Corporation. This element of Porter’s Five Forces analysis model deals with the potential effects of substitutes on the growth of the restaurant chain business. The following external factors make the threat of substitution a strong force against McDonald’s:

  • High substitute availability – Strong Force
  • Low switching costs for consumers – Strong Force
  • Low cost-performance ratio of many substitutes – Strong Force

There are many substitutes to McDonald’s products, such as products from artisanal food producers and local bakeries. Also, consumers can cook their own food at home. In the Five Forces analysis model, this external factor contributes to the strength of the threat of substitution in the fast-food service industry. In addition, it is easy to shift from McDonald’s to substitutes because of the low switching costs. For example, shifting from the company’s meals to substitute meals typically involves insignificant or minimal disadvantages, such as additional time consumption for food preparation, or slightly higher costs per meal in some cases. Moreover, many substitutes are competitive in terms of quality and customer satisfaction with affordable prices (low cost-performance ratio), such as consumers’ satisfaction in the health benefits of home-cooked meals. In this element of the Five Forces analysis of McDonald’s Corporation, external factors make substitutes a major strategic issue that requires approaches like product quality improvement. Such approaches need to be included in the company’s current efforts to encourage people to eat in fast-food restaurants instead of resorting to substitutes. Such efforts are evident in McDonald’s corporate mission and vision statements.

Threat of New Entrants or New Entry (Moderate Force)

New entrants can impact McDonald’s market share and financial performance. This element of the Five Forces analysis refers to the effects of new players on restaurant businesses. In McDonald’s case, the moderate threat of new entry is based on the following external factors:

  • Low switching costs – Strong Force
  • High variability of capital costs – Moderate Force
  • High cost of brand development for food service companies – Weak Force

The low switching costs allow consumers to easily move from McDonald’s toward new fast-food restaurant companies. In Porter’s Five Forces analysis model, this external factor strengthens the threat of new entrants against existing players in the food service industry. Also, the high variability of capital costs in establishing a new restaurant business only partially limits the entry of new businesses in the market. This external factor leads to the moderate threat of new entry against McDonald’s. However, it is costly to build a strong brand in the fast-food industry. Many small and medium-sized businesses lack the resources to create a strong brand that rivals the McDonald’s brand. Thus, the external factors in this element of the Five Forces analysis show that the threat of new entrants is moderately considerable but not the most important strategic issue for the multinational restaurant chain business.

References

  • Anastasiu, L., Gavriş, O., & Maier, D. (2020). Is human capital ready for change? A strategic approach adapting Porter’s five forces to human resources. Sustainability, 12(6), 2300.
  • Burke, A., van Stel, A., & Thurik, R. (2010). Blue ocean vs. Five Forces. Harvard Business Review, 88(5), 28-29.
  • Dobbs, M. (2014). Guidelines for applying Porter’s Five Forces framework: A set of industry analysis templates. Competitiveness Review, 24(1), 32-45.
  • Martinez-Contreras, R. M., Hernandez-Mora, N. C., Vargas-Leguizamon, Y. R., & Borja-Barrera, S. M. (2022). PESTEL analysis and the Porter’s Five Forces: An integrated model of strategic sectors. In Handbook of Research on Organizational Sustainability in Turbulent Economies (pp. 292-314). IGI Global.
  • McDonald’s Corporation – Form 10-K.
  • McDonald’s Corporation’s Website.
  • Roy, D. (2011). Strategic Foresight and Porter’s Five Forces. GRIN Verlag.
  • U.S. Department of Agriculture – Economic Research Service – Food Service Industry – Market Segments.

FAQs

What are the 5 forces of M Porter's model? ›

These forces include the number and power of a company's competitive rivals, potential new market entrants, suppliers, customers, and substitute products that influence a company's profitability.

What are substitutes for Mcdonalds? ›

Privately-owned Burger King is McDonald's closest competitor. Yum Brands operates Taco Bell, KFC, and Pizza Hut.

What is the Porter's five forces model explain with an example? ›

According to this framework, competitiveness does not only come from competitors. Rather, the state of competition in an industry depends on five basic forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products or services, and existing industry rivalry.

What is Porter's 5 forces model how different is it from a SWOT analysis? ›

Porter's 5 Forces is a comparative analysis strategy that analyzes competitive market forces within an industry. SWOT analysis looks at the strengths, weaknesses, opportunities, and threats of an individual or organization to analyze its internal potential.

What is the main objective of the 5 forces model? ›

The objective of Porter's Five Forces model is to assess the overall competitive landscape of a particular business sector. Each of these five forces corresponds to a key component of market intensity.

Why Porter's five forces model is important? ›

Porter's Five Forces Model is an important tool for understanding the main competitive forces at work in an industry. This can help you to assess the attractiveness of an industry, and pinpoint areas where you can adjust your strategy to improve profitability.

How does McDonald's have a competitive advantage? ›

Cheat prices is McDonald's main competitive advantage. The company is engaged in an extensive utilization of economies of scale to achieve the cost advantage. True to 'fast food' format of its restaurants, McDonald's is famous for the speed of customer service without compromising the quality of the service.

What is McDonald's target market? ›

McDonald's Segmentation, Targeting and Positioning
Type of segmentationSegmentation criteriaMcDonald's target segment
DemographicIncomeLow and middle
OccupationStudents, employees, professionals
BehavioralDegree of loyalty'Hard core loyals' and 'Switchers'
Benefits soughtCost benefits, time efficiency
9 more rows
22 Jun 2022

What is McDonald's mission statement? ›

Our mission is to make delicious feel-good moments easy for everyone. This is how we uniquely feed and foster communities.

Is Porter's five forces still relevant today? ›

Porter's five forces is a widely used framework for analyzing industries. It refers to the competitive influences shaping the corporate strategies that are likely to be successful. The framework has held up well over time and continues to be a staple of the coursework for business classes.

How does Porter's competitive forces model help companies develop competitive strategies using information systems? ›

Porter's competitive forces model helps companies determine what they should do to be more productive by comparing what their competitors are doing. It also brings the companies costs down and makes them more efficient as a business by using Information Systems.

Why Porters 5 forces is better than SWOT? ›

While they both help in assessing your company's strengths and weaknesses relative to industry opportunities and challenges, a primary difference is that SWOT focuses more on company-specific elements while Five Forces involves a look at five important competitive factors when making a strategic decision.

What are the 5 competitive strategies? ›

Here are five types of competitive strategy and an example for each:
  • Cost leadership. ...
  • Product differentiation. ...
  • Customer relationship management (CRM) ...
  • Cost focus. ...
  • Commitment to customers strategy.
16 Nov 2021

Is Porter's 5 forces internal or external? ›

As the name suggests, there are five factors that make up Porter's 5 Forces. They are all external, so they have little to do with the internal structure of a corporation: Industry competition: A higher degree of competition means the power of competing companies decreases.

Which of Porter's five forces is the strongest? ›

According to Porter, Rivalry among competing firms is usually the most powerful of the five competitive forces.

Which of the five competitive forces is strongest and why? ›

The rivalry among competitors is the strongest of the five forces. This rivalry may cause price wars between competing firms if the industry is centered on price competition. Other sectors compete on product offerings.

How can Porter's five forces be used to analysis the external environment? ›

Porter's Five Forces Framework Model analyses the competitive forces within the environment in which a company operates, to assess the potential for profitability in an industry. Porter consists of the threat of new entrants, the threat of substitute, buyer power, supplier power, and rivalry among existing competitors.

What is supplier power in Porter's five forces? ›

What is Supplier Power? Suppliers have the power to influence price, as well as the availability of resources/inputs. Suppliers are most powerful when companies are dependent on them and cannot switch to other suppliers because of higher costs or lack of alternative sources.

What makes McDonald's so successful? ›

McDonald's success today is largely attributed to its franchising model, consistency, and innovation. Through their franchising model, they were able to enjoy rapid growth.

What is the business model of McDonald? ›

Franchise Business Model of McDonald's

McDonald's follows a three-structured franchise model. The company's franchisees own and operate 90% of its restaurants. Franchisees operate their restaurants with oversight from the company and act as their employer.

What are the strength of McDonald's? ›

1. A strong reputation, brand name, and image. McDonald's ranks tenth in the world's most valuable brands. A high brand value has helped the company consistently dominate the industry, despite strong competition.

What is the marketing strategy of McDonald's? ›

McDonald's uses a value-based pricing strategy and strives to provide value to its customers across the menu, and also offers a $1-3 menu. In essence, their goal is to keep prices as low as possible.

What pricing strategy does McDonalds use? ›

McDonald's pricing strategy

In business marketing, there are three generic strategies: focus, differentiation and cost leadership. McDonald's has been successful at employing cost leadership marketing strategy by offering fast food meals at low prices (Scilly 2016).

What is McDonald's unique selling point? ›

McDonald's became a great example of the power of the Unique Selling Proposition (USP) back in the 1950s when, under the tireless energy of entrepreneur Ray Kroc, it became the go-to eatery for American families seeking speedy service and a consistent taste visit after visit.

What are the 7 McDonald's core values? ›

McDonald's core values comprise “we place the customer experience at the core of all we do, we are committed to our people, we believe in the McDonald's system, we operate our business ethically, we give back to our communities, we grow our business profitably, and we strive continually to improve.” The core values ...

What are McDonald's core brand values? ›

The core values of the brand have included quality, cleanliness, service and high standard value. Their core values are reflected in their outlets, the pricing of their products and their employees. Gaining high importance among masses via its 5 Ps implementation.

What is McDonald's leadership style? ›

Leadership is the ability to motivate employees so that they accomplish their tasks. In order to do so, McDonald's has created four principles they follow which include individualized motivation, individualized store goals, goals that change every six months, and opportunities for salary increases.

Do you think five forces model can be used in todays competitive world? ›

Porter's Five Forces cannot be considered as outdated. The basic idea that each company is operating in a network of Buyers, Suppliers, Substitutes, New Entrants and Competitors is still valid. The three new forces just influence each of the Five Forces.

What forces does the five competitive forces model address the competitive forces in the five competitive forces model does not include? ›

What "forces" does the five competitive forces model address? The competitive forces in the five competitive force model does not include the allocative efficiency of producers.

What are the criticisms of the five forces model? ›

Criticisms of the Five Forces Model

It assumes perfect competition in the market place, and does not take into account that some markets are highly regulated, creating imbalances and reduced competitive forces are at play.

What strategies can companies use to gain competitive advantage? ›

Building a Competitive Advantage

Michael Porter, the famous Harvard Business School professor, identified three strategies for establishing a competitive advantage: Cost Leadership, Differentiation, and Focus (which includes both Cost Focus and Differentiation Focus)[1].

What is the relationship between the competitive forces model and the value chain model? ›

It involves identifying and analyzing the five competitive forces, which determines the strengths and weaknesses. Porter's value chain model is a business model describing the activities involving in creating a product. It is a tool used for strategic management purposes.

How do you identify a competitive advantage? ›

5 Practical Tips To Find Your Competitive Advantage
  1. Perform a competitive audit – both with marketing and the actual product. ...
  2. Talk to your existing customers. ...
  3. Talk to prospective customers. ...
  4. Now, assess your opportunities to improve or develop your competitive advantage. ...
  5. Communicate it!
20 Nov 2017

What is Porter's 5 forces analysis example? ›

The threat of new entrants is medium to low. Threat of substitute products: While companies could copy Argento's unpatented products, the demand for athletic wear high and continuing to grow. The threat of substitute products is low. Bargaining power of buyers: Argento's buyers include both end-users and wholesale.

How would you use Porter's 5 forces model for analyzing the strength or weakness of any organization? ›

Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every industry and helps determine an industry's weaknesses and strengths. Five Forces analysis is frequently used to identify an industry's structure to determine corporate strategy.

What are some of the strengths of the Five Forces model? ›

Supplier Power: The power of suppliers to increase the cost of inputs. Buyer Power: The power of customers to reduce prices. Competitive Rivalry: The strength/power of competition in the industry. The Threat of Substitution: The extent to which different products and services can be used in place of your own.

What is the main objective of the 5 forces model? ›

The objective of Porter's Five Forces model is to assess the overall competitive landscape of a particular business sector. Each of these five forces corresponds to a key component of market intensity.

What are the benefits of Porter's five forces analysis? ›

Porter's Five Forces helps to identify where power lies in a business situation. This is useful both in understanding how strong an organisation's competitive position is currently, and how it can achieve competitive advantage.

Why is Porter's 5 forces important? ›

Porter's Five Forces Model is an important tool for understanding the main competitive forces at work in an industry. This can help you to assess the attractiveness of an industry, and pinpoint areas where you can adjust your strategy to improve profitability.

Is SWOT the same as Porter's five forces? ›

SWOT analysis looks at the strengths, weaknesses, opportunities, and threats of an individual or organization to analyze its internal potential. While Porter's 5 Forces are all external factors, the SWOT analysis examines both internal (strengths and weaknesses) and external (opportunities and threats) forces.

Is Porter's 5 forces still relevant? ›

Porter's five forces is a widely used framework for analyzing industries. It refers to the competitive influences shaping the corporate strategies that are likely to be successful. The framework has held up well over time and continues to be a staple of the coursework for business classes.

What is the importance of doing situation analysis for companies? ›

An analysis can forecast what results a company can expect—based on the decisions made—so it can adjust its strategies to meet its goals. A situational analysis can reveal many important details about a business such as: The opinions and experiences of customers and stakeholders. A business's strength and weakness(es)

What are the 5 competitive strategies? ›

Here are five types of competitive strategy and an example for each:
  • Cost leadership. ...
  • Product differentiation. ...
  • Customer relationship management (CRM) ...
  • Cost focus. ...
  • Commitment to customers strategy.
16 Nov 2021

Who created Porter's 5 forces? ›

The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University. This framework was first published in Harvard Business Review in 1979.

Is Porter's 5 forces internal or external? ›

As the name suggests, there are five factors that make up Porter's 5 Forces. They are all external, so they have little to do with the internal structure of a corporation: Industry competition: A higher degree of competition means the power of competing companies decreases.

Is Porter's 5 forces still relevant? ›

Porter's five forces is a widely used framework for analyzing industries. It refers to the competitive influences shaping the corporate strategies that are likely to be successful. The framework has held up well over time and continues to be a staple of the coursework for business classes.

Which of the five competitive forces is strongest and why? ›

The rivalry among competitors is the strongest of the five forces. This rivalry may cause price wars between competing firms if the industry is centered on price competition. Other sectors compete on product offerings.

How can Porter's five forces be used to analysis the external environment? ›

Porter's Five Forces Framework Model analyses the competitive forces within the environment in which a company operates, to assess the potential for profitability in an industry. Porter consists of the threat of new entrants, the threat of substitute, buyer power, supplier power, and rivalry among existing competitors.

Is Porter's five forces micro or macro? ›

Porter's Five Forces is considered a macro tool in business analytics – it looks at the industry's economy as a whole, while a SWOT analysis is a microanalytical tool, focusing on a specific company's data and analysis.

What is supplier power in Porter's five forces? ›

What is Supplier Power? Suppliers have the power to influence price, as well as the availability of resources/inputs. Suppliers are most powerful when companies are dependent on them and cannot switch to other suppliers because of higher costs or lack of alternative sources.

What is competitive rivalry in Porter's five forces? ›

Competitive rivalry is a measure of the extent of competition among existing firms. Intense rivalry can limit profits and lead to competitive moves, including price cutting, increased advertising expenditures, or spending on service/product improvements and innovation.

What are the criticisms of the five forces model? ›

Criticisms of the Five Forces Model

It assumes perfect competition in the market place, and does not take into account that some markets are highly regulated, creating imbalances and reduced competitive forces are at play.

What is the most important force in the Porter's five forces? ›

Regarded as the most expressive in Porter's 5 forces model, the rivalry between competitors is the major determining factor for market competitiveness.

Which of Porter's five forces is the strongest? ›

According to Porter, Rivalry among competing firms is usually the most powerful of the five competitive forces.

Which of Porter's five forces is generally the strongest industry force and is influenced by all other forces? ›

Lesson Summary. Porter's Five Forces is a framework based on the competitive forces that influence an industry the most, and it helps us determine whether we can be successful in an industry. These forces are: Competitive rivalry, which is the strongest influence on whether entering an industry would be profitable.

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