In the business world, there are a handful of companies that everyone knows. McDonald’s is one of them. You may be surprised to learn that McDonald’s is actually a cost leader in the fast food industry. What does that mean, and how have they been so successful using this strategy?
In this article, we will take a look at McDonald’s cost leadership strategy and explore five valuable lessons that other companies can learn from it.
McDonald’s cost leadership strategy
Basics of cost leadership strategy
Cost leadership is a generic strategy (one of Porter’s strategies) employed by firms to achieve competitive advantage. The heart of this strategy is to produce goods or services at a lower cost than your competitors.
By doing so, cost leadership can lead to lower prices, which can attract more customers and generate more sales.
There are a few key things to keep in mind when pursuing a cost leadership strategy:
- First, you must have a clear understanding of your costs. It means knowing what goes into your product or service and how much it costs to produce.
- Second, you must continually strive to find ways to reduce your costs. It could involve improving your processes, using cheaper materials, or finding new suppliers.
- Third, you must be able to pass on some of the cost savings to your customers. Adding value or lowering prices are two ways to do this.
What is McDonald’s cost leadership strategy?
You’re probably familiar with McDonald’s cost leadership strategy. But do you know what it is?
In a nutshell, McDonald’s’ cost leadership strategy is about offering a cheaper menu option than its competitors. It doesn’t mean they’re skimping on quality—far from it.
What it does mean is that they’re able to keep their prices low by streamlining their production process and keeping things like advertising and labor costs down, which is their main competitive advantage.
Cost control is key to a cost-leadership strategy, which enables a company to earn above-average returns. McDonald’s is the king of fast food because they know how to run a lean operation and keep its costs down.
If you’re looking to emulate their success, here are five valuable lessons you can learn from the king of fast food.
According to McDonald’s cost leadership strategy, over 761,000 people work for McDonald’s in the US. More than 64% of these individuals are over 20 years old, and the majority only make $7.25 per hour.
1. McDonald’s cost leadership strategy: vertical integration
McDonald’s uses cost leadership as its primary generic strategy. It involves minimizing costs so that it can offer products at low prices.
Additionally, McDonald’s employs broad differentiation as a secondary or supporting generic strategy. It consists of developing the business and its products to distinguish them from competitors.
For example, through McCafé products, McDonald’s applies the broad differentiation generic strategy.
Vertical integration is also a strategic objective linked to McDonald’s cost-leadership generic strategy. For example, McDonald’s owns facilities that produce standardized mixtures of ingredients.
Cost minimization is a strategic financial objective based on the cost leadership generic strategy. In addition, product innovation is related to McDonald’s broad differentiation generic strategy.
2. Market development
Early on in its history, McDonald’s adopted market expansion as its primary strategy to grow the company. Most countries in Africa, except for Mongolia and some areas of the Middle East and West Asia, already have McDonald’s stores.
Consequently, market development has become a secondary strategy for intensive growth.
Establishing new locations in new regions, such as new McDonald’s restaurants in African or Middle Eastern nations where the corporation currently has no presence, is a strategic goal for this intense expansion approach.
McDonald’s cost leadership strategy supports this extreme growth plan with low prices in new regions, based on its basic objective of cost leadership.
According to the data, McDonald’s has more than 37,000 restaurants worldwide, spread over 119 nations and six continents.
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3. Product development
McDonald’s secondary or supporting intensive growth strategy is product development. McDonald’s creates new goods over time using this aggressive expansion approach, including new McCafé items.
These new products could be tweaks to current products or original products. This high-growth strategy aims to attract more customers by introducing them to fresh products.
In terms of new items that provide the company with a distinct identity, this intense growth approach is consistent with McDonald’s broad differentiation generic strategy.
4. The Big Mac pricing strategy
McDonald’s is frequently compelled to alter its price strategy to better suit its target market due to the fluctuating value of currencies worldwide. For instance, Big Mac prices differ between countries.
McDonald’s keeps its costs low by streamlining operations and investing in efficient systems.
The Big Mac costs $60 more in Switzerland than it does in the US (price base of the product). However, it costs $0.60 less in China than in the United States for a Big Mac.
Most of the company’s restaurants are opened in large cities like New Delhi, Shanghai, and Beijing, and so on to maintain a price range for all of its items based on geography and income distribution.
Big Mac as a part of McDonald’s cost leadership strategy
McDonald’s cost leadership strategy’s main objective is first to draw middle-class and upper-class citizens since they can pay McDonald’s prices. After that, they gradually go after people in the lower middle class.
For example, it remains popular among lower, medium, and upper middle classes in the United States. It appeals to all categories, from the poor to the high class.
5. Corporate strategy of McDonald’s
McDonald’s concentrates on one business plan as part of its overall company strategy. According to McDonald’s cost leadership strategy, the company’s revenue must come from a single food product line.
The company can focus all of its resources and skills on that one area, which is the strategy’s main benefit. However, this tactic also makes the company more susceptible to changes in the external environment and competitors.
One such instance is McLibel, a competitor of McDonald’s in Britain.
How does this strategy help McDonald’s save money?
McDonald’s cost leadership strategy helps it to save money by reducing its overall costs. This strategy enables the company to offer its products at lower prices, attracting more customers. As a result, McDonald’s can generate more revenue, which helps offset its costs.
This strategy also allows McDonald’s to expand its operations into new markets, which further increases its revenue. In addition, they have a strong brand that allows them to charge a premium price for their products.
What Are Some Benefits of This Strategy for Customers?
When looking for great value, McDonald’s is always a solid choice. McDonald’s cost leadership strategy keeps prices low while still offering a great product.
But what are some specific benefits of this strategy for customers? Here are just a few:
- There’s no doubt you’re going to get a good meal at an affordable price.
- You can always find something to eat, no matter what time of day it is.
- No matter where you go, the food is consistently delicious, which increases the value of the business in the market.
- There’s a McDonald’s everywhere, so you’re never too far from one.
- They have a huge variety of menu items, so you’re sure to find something you love
The following factors support cost leadership in the restaurant chain:
1. Quick Delivery of Food
McDonald’s can essentially serve more customers in an hour than its rivals. For example, producing a hamburger has been reduced and optimized over time, so any employee may learn it fast.
2. Vertical Fusion:
McDonald’s supports vertical integration, in contrast to some of its rivals. The corporation owns the facilities that generate standardized ingredient blends for its menu items. Additionally, it manages its product transportation and raises its beef through contracted growers.
According to McKinsey’s Model, McDonald’s used a cost leadership strategy to increase its market share significantly. It also establishes precise, SMART objectives to gain long-term and short-term vision.
To enhance operations and settle disputes, McDonald’s cost leadership strategy employs a participative leadership style in which managers interact with staff members at all levels.
How has this strategy changed over time?
It’s been quite a journey as McDonald’s cost leadership strategy has evolved. What started as a strategy to keep their prices low and attract customers has become much more complex.
But even today, McDonald’s is still all about keeping costs low. They’ve invested in new technology that helps them automate the food preparation process, and they’re constantly looking for ways to reduce their overhead costs.
McDonald’s cost leadership strategy, which focuses on costs, has helped them remain competitive, but it’s also put a lot of pressure on margins. They’ve had to make tough decisions to maintain their position as a cost leader.
How can other companies learn from McDonald’s cost leadership strategy?
In recent years, McDonald’s has been highly successful in its cost leadership strategy. The company has kept its costs low while still providing a high-quality product. Other businesses can learn from McDonald’s cost leadership strategy in several ways.
To begin with, all their locations use standardized ingredients and processes to keep costs down. As a result, they are able to take advantage of economies of scale and get better deals from their suppliers.
Another way they control costs is by efficient operations. For example, they have a highly centralized supply chain and use technology to streamline ordering and food preparation. By carefully controlling its costs, McDonald’s can offer low prices that appeal to many customers.
McDonald’s is the first global restaurant company to prove its manifesto of “Quality, Service, and Value” and will continue to be a leader in the food industry.
It also becomes the most successful fast food chain in the world through McDonald’s cost leadership strategy that drives customer traffic and creates profits.
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