McDonalds may be seen as a strong competitor with several competitive advantages. Michael Porter has considered the way in which firms compete, and defined two types of competitive advantage. These are cost advantage and differentiation. These are two different ways a competitor may get the edge on its rivals. For example, if there are two products which are very similar, neither has the advantage, but if one looks better, or has extra features, it may have an advantage just as if one costs a company less to produce, the company will have an advantage afforded by superior profits.
To compete in the long term Porter has argued that there should be a source of competitive advantage, however, that the two advantages of cost and differentiation are not compatible, and will create consumer confusion. Others, such as Asker, argues that the two may be compatible. If we look at McDonalds there are both cost and differentiation advantages. In trying to undertake a cost advantage the company may seek to be the cost leader in either the industry, or just the relevant segment of the industry.
In each industry or segment only one company may occupy the cost leadership position. This means a company will “find and exploit all sources of cost advantage… [and] … sell a standards no frills product” (Porter, 1985; 13). This means that the cost to the firm of producing the good is lower than to its competitors. This may be due to economies of scale as well as the way in which costs can be reduced, such as influencing the power held over suppliers and contracting out labour.
To summarise the cost advantage this is seen as a strategy that bring goods of an acceptable quality to market, but has lower production costs than its competitors, is able to maintain that cost gap and as a result benefits form higher than average profits. This is achieved by careful and effective management of the cost drivers for the business (Thompson, 1998). McDonalds manages this with the careful management of the supply chain.
Porter described what he saw as a value chain (Porter, 1985). He divided this into five separate sections; inbound logistics, operations, outbound logistics, marketing and sales, and service (Porter, 1985). These different activities are also linked by the same support activities, there are four of these, but they can be seen to be active throughout the entire value chain, they are firm infrastructure, human resource management, technological development and procurement (Porter, 1985).
These support activities may relate to more than only one section of the supply chain and as they are in existence they also add costs to the value chain, but are necessary and as such they must be seen to actively add value to the product (Porter, 1985). The reduction of cost should not be achieved at the cost of the quality or value that the support services offer. The way in which cost saving may be seen to be produced within the value chain is by the linkages in the supply chain.
In this, the activities of one part of the supply chain can be seen to affect the activities and costs of another part of the supply chain. The inbound logistics are very important in this business as there is a fast turnover of stock, which in conjunction with procurement as well as human resources and then operations ensures that the demand is satisfied. The way in which this is achieved is via economies of scale which are maximised throughout the systems of in and outbound logistics, especially if we look at isolated restaurants. As already discussed the value chain can help to reduce costs.
This can give the producing company a competitive advantage as long as the goods they are producing are of an acceptable quality with lower costs that that of its competitors as well as being able to sustain that cost gap (Grant, 1998). Differentiation is attained through the selection of one or more characteristics which are valued by the customer, these may be different characteristics for different markets. To understand where the advantages arise and how the costs are incurred a cost analysis may be undertaken, with the percentage cost being attributed to the core and supporting activities.
An example of using cost analysis in value chains has been demonstrated by some motor manufacturers. 1) Inbound Logistics; There are careful handling and stock control measures to ensure the stock delivered is maintained in good quality, but the strongest point is the just in time system which is used. There company arrange all of their own inbound logistics and many of the companies that supply McDonalds are either supplying totally or mostly McDonalds, as seen with companies such as Golden West Foods.
Alternatively McDonalds are able to exercise a high level of control over the supplies 2) Operations; The set up of these companies is designed to keep quality high by way of the integrated team work, and by use of standardised system and monitoring of those systems. 3) Outbound Logistics; There are a large number of goods going out in the form of burgers, shakes and fires, these are managed with a strict and efficient stock rotation that makes sure there is a first in first out system.
The use of time cards measures the length of time food is held, and food older than this is meant to be thrown away, for example, burgers that are not sold after ten minuets should be rejected. This system reduces costs and also helps make sure that the stock held is managed so there is always fresh food ready. Former sales patterns are used to calculate the optimum level of different food types to be held ready. 4) Marketing and Sales; the marketing is targeted to a specific audience.
The target markets are divided into different groups, such as adults and children. The adult marketing sees specific products advertised, whereas marketing aimed at children is more aimed at the brand making the venture appear fun and desirable (Mintzberg et al, 1998). 5) Service; This is also standardised in terms of initial and after sales service if there are complaints, the idea is that standardised goods should have less divsion to create complaints and standard service when ordering will also satisfy customer demands by giving them the service they expect.
This is also supported by differentiation of different types, in the past mostly aimed at brand image. The image of the uniform goods, the level of cleanliness and also supporting images, such as the way the restaurants may become involved in local communities which was also furthered in 1974, when the first Ronald McDonald house was opened. This was a house in Philadelphia that could be used by families of critically ill children when their children were in hospital. These are all forms of differentiation that have lead to competitive advantages.