Introduction
The fast food industry is a multi-billion venture for companies operating in the United States and those that have a foothold in the global market. One of the successful American publicly traded franchises is McDonald's with food stores both in the United States and beyond. McDonald's has a net worth of about $110B, annual revenues of $25.36 B and a profit margin of $5.7B by close of the financial year in 2016. Besides, McDonald's has a strong history of acquisition spanning from the 90’s where it acquired Chipotle. Followed by Donato Pizza, KeyCorp, Essex Capital Markets Inc., Wallach Company, Boston Market, Redbox, Coinstar, Xerox and recently there is an on-going negotiation for the acquisition of Burger King and Tim Hortons (Faulkner, Teerikangas & Joseph, 2012). From the financials it can be deduced that McDonald's is a stalwart in the fast food industry; however, CKE Restaurant, Inc. comes in as a competitor in the U.S market. CKE Restaurant, Inc. has a net worth of about $1M and does not operate outside U.S. This research paper discusses the merger, acquisition and international strategies used by McDonalds and CKE Restaurant, Inc. in their acquisition pursuits.
Strategies leading to the Acquisition of Essex Capital Markets by McDonald's
The acquisition of Essex Capital Markets Inc. by McDonald's cemented its diversification strategy away from the established foothold in the fast food industry. McDonald's used what is termed as unrelated diversification strategy by entering into capital markets, which is completely different from its core business. In my view, the use of unrelated diversification in the acquisition of Essex was a wise decision taken by McDonald's. In particular, acquisition and merger experts argue that unrelated diversification provides shareholders with a superior way of delimiting investment risk. McDonald's as an investor used the unrelated diversification strategy as a means of justifying the need for establishing a conglomerate merger with Essex, which helps significantly reduce the investment risk. Besides, it is critical to note that adding countercyclical lines of business to the main venture may result in a stabilized income earning and a stronger valuation in the stock markets. What this means is that McDonald's unrelated diversification in financial markets helped it enter into a business cycle and economic risks different from the core business thereby enhancing the stability of its income streams. But more importantly, acquisition of Essex gives McDonalds economies of scale and scope, increases its basket of products offered in the market and helps it acquire vertical integration. Further, it can be argued that acquisitions help the acquirer boost its growth portfolio and expectations, realize cost synergies and leverage the company’s earnings per share. McDonald's is known to have a strong management team, and therefore, it would assist the company reap benefits from the acquisition. The benefits of the synergies from the two companies shall be achieved if the McDonalds management augments the company’s core skills with those of Essex. In retrospect, the benefits of unrelated diversification strategy are ingrained in the increased efficiency especially in cash management and allocation capital investment and capacity to retrieve profits from low growth business operations and invest it in high-growth business operations. For this reason, McDonald’s management skills and resources become quintessential in achieving diversification benefits. Finally, McDonald's is in many ways diversified to improve the operations of Essex Capital Markets Inc. by strengthening the company’s administrative practices and exerting greater corporate discipline. These reasons justify McDonald’s acquisition of Essex (DePamphilis, 2011).
Merger for CKE Restaurant, Inc.
CKE Restaurants, Inc. has been facing difficult economic and financial times characterized by dwindling profit fortunes and competition. For the last one decade, the fast food chain is on a turnaround strategy informed by five-point strategies. Among the five strategic plans include: increasing brand value through product promotion and focusing on merger and acquisitions. Of the two, the restaurant may become profitable by merging with a stalwart company in the fast food industry such as Starbucks, which for a long period has demonstrated stellar performance regarding profitability and globalization (Faulkner, Teerikangas & Joseph, 2012). CKE Restaurant, Inc. merger with Starbucks is a profitable target because of the following reasons:
A merger with Starbucks presents CKE Restaurants, Inc. with an opportunity for cost saving and financial balance. Cost saving is achieved through economies of scope and scale, tax gains, and an increased market share. In essence, increased fast food output due to the merger can reduce average costs in the long run. Lower average costs translate to lower prices to the customers thereby increasing CKE Restaurants, Inc. competitiveness.
CKE Restaurants, Inc. through the merger has an opportunity to obtain or share quality staff trained by Starbucks in its multinational conglomerates. Besides, the employees obtained from Starbucks will introduce CKE Restaurants, Inc. with additional skills and knowledge about the industry and other business intelligence. In particular, one of the turnaround strategies for CKE Restaurants, Inc. in the five-point plan is to revamp its management skills, and therefore, it is expected that a merger with Starbucks will introduce effective management practices and processes.
CKE Restaurant, Inc. will have an opportunity to access valuable assets and funds for development of its brand presence and processes. Experts in merger and acquisitions argue that better distribution and production facilities are easier to purchase as opposed to building from scratch, and therefore, CKE Restaurants, Inc. will benefit immensely from Starbucks’ established production and distribution assets.
In a conglomerate merger for related diversification of CKE Restaurants, Inc. and Starbucks, the two companies and more so the former has an opportunity to diversify its products. In particular, CKE Restaurants, Inc. could benefit from Starbucks’ knowledge in fast foods enabling it to diversify its products and venture into new markets.
A merger is expected to provide CKE Restaurants, Inc. with opportunities for organic growth. Meaning that the company’s current business level strategies for growth will be accelerated. More importantly, the two businesses can combine resources and cut costs, advertise jointly, remove duplicated functions and eventually spur their growth.
CKE Restaurants, Inc., in the long run, would have access to a wider customer base including international markets. A larger market share for CKE Restaurants, Inc. is beneficial to help its turnaround from its slackening growth and enter into profitable realms for the benefit of the shareholders.
Finally, a merger would allow greater investment for the two companies in research and development, to discover innovations and potential markets. Research and development in the fast food industry are important to unravel customer dynamics, improve product quality and discover potential risks (Bruner, 2014).
The multiplicity of these reasons makes Starbucks a perfect target for CKE Restaurants, Inc. in its turnaround strategy towards profitability and increasing brand presence in the target markets.
McDonald’s International Business Level Strategies
McDonald's has one of the successful business level strategies in the fast food industry. It maintains a cost leadership strategy and product differentiation. The company has been able to cut down costs by focusing on the production of standardized food products and hiring unskilled human resources as opposed to employing highly trained cooks. Due to employing unskilled laborers, McDonald's has managed to pay employees the minimum wage and maintain low-price leadership through the division of labor. As a low-cost, fast food provider, McDonald can offer the market with relatively cheaper products in relations to its competitors such as Starbucks and Arby’s. The daily operations of the stores are maintained at a bare minimum to achieve low-cost leadership.
The second business level strategy is product differentiation. It makes use of a diverse product differentiation and distinguishing its brand from those of other competitors. McDonald's uses promotional messages to differentiate its products and services in the minds of its customers. The first strategy for differentiation is the use superior taste quality; McDonald's positions itself to give its customers a taste quality above that of the competitors. Secondly, McDonald's staff are instructed to be ‘’fast’’ in delivering fast foods to customers as a basis for differentiation. Being efficient has been a key differentiation strategy for McDonald's and routinely locates its stores off the highway or well-travelled exits and business districts. Finally, consumers in the Americas and Europe are health-conscious, and McDonald's has made its commitment to promoting sandwiches with low fat and fewer sugars, which is an important product differentiation strategy targeting health-conscious consumers (Carey, 2001).
McDonalds International Corporate-Level Strategy
McDonald’s corporate level strategy is characterized with low-levels of diversification. Fast food is McDonald's core business, and 95% of the company’s revenues come from revenues from restaurants and fees obtained from its franchises. By insisting focus on the same market and business, McDonald's can reap positive returns from its core business to gain market power and share and increase customer loyalty. Even when McDonald's has low diversification, in the minuscule diversification efforts, it employs related diversification, which enables it to produce homogenous fast food products such burgers and salads coming in different varieties such as Mac chicken and Big Mac. Besides, the conglomerate has franchises all around the world (DePamphilis, 2011).
Recommendations for improvement
There is a need for McDonald to balance competitive price in relation to the premium menu option. The company has a wide range of products, which are difficult to maintain as the menu size may increase due to the inclusion of premium line products such as grilled chicken, McCafé coffee, and salads. The increasing variety of products in the menu is strenuous on employees to prepare meals accordingly, and therefore, there is need to balance products offered on the premium menu
McDonald needs to overcome stereotypes emanating from a health-conscious customer base. The stereotypes can be borne through labeling of ingredient percentages and promoting products low in fats and sugar
The company has to promote a safe and positive work environment as a way of increasing employee retention and increase pay from the minimum wage to attract highly qualified employees
It has to maintain its market share even with the growing competition especially from Burger King that uses a similar business model and offer consumers cheaper products than McDonald's. For this reason, it is recommended that McDonald's should continue innovating to compete and maintain market share for low-cost, fast foods (Faulkner, Teerikangas & Joseph, 2012).
CKE Restaurants, Inc. recommended business level strategy
For CKE Restaurants, Inc. to increase its profitability, it is recommended that CKE adopts product differentiation business-level strategy. Product differentiation requires CKE Restaurants, Inc. to take actions towards producing goods and services that can be perceived by customers as being different from those of the competitors. However, the differentiated products need to have superior quality and retail at the same price. Further, CKE Restaurant, Inc. should also transform the stores to become social or meeting holding places rather than just fast food joints (Jurek, 2013).
CKE Restaurant, Inc. recommended business level strategy
It is recommended that CKE Restaurants, Inc. adopts a value creation strategy, in which case, it pursues to edge out its close competitors by acquiring more market share. The company may create value through adding perceived or real value to the products and services by taking advantage of economies of scope, resource endowment and employee skill sets. The key driver towards value creation is diversification, which engenders offering more products in the market to dominate a significant part of the overall market share (DePamphilis, 2011).
Conclusion
Merger and acquisitions bring significant financial and non-financial benefits to the acquirer or the merged organizations. More importantly, it helps organization venture into new markets, cut down operational costs due to economies of scope, increase potential growth and stability, and more importantly, raise shareholder value.
References
Bruner, R. F. (2014). Applied mergers and acquisitions. Hoboken, N.J: John Wiley & Sons.
Carey, D (2001). Harvard business reviews on mergers and acquisitions. Boston, MA: Harvard Business School Press.
DePamphilis, D. M. (2011). Mergers and acquisitions basics: All you need to know. Burlington, MA: Academic Press.
Faulkner, D., Teerikangas, S., & Joseph, R. J. (2012). The handbook of mergers and acquisitions. Oxford: Oxford University Press.
Jurek, W., (2013). Merger and acquisition sourcebook. Santa Barbara, Calif: Quality Services Co.
