| Final Project Report | International Business Management | MKT-324 | | |

Submitted to: Dr. Amira Khattak

Submitted by: Aqsa Qamar Sarah Malik Sabah Anwar Hayat Solangi Afaq Baig Date: January, 26th, 2015
Table of Contents 1.0 Company Introduction 4 2.0 Problem Statement 5 3.0 Literature Review 5 3.1 The Concept of Internationalization 5 3.12 The Entry Mode 5 3.13 The Factors That Influence Entry Mode Choice 6 4.0 Findings 7 4.1 Mode of entry 7 4.12 Autonomy in Operations 8 4.13 Conditions of Franchising. 8 4.14 Restaurant Ownership 8 4.2 Location 9 4.21 Mission as the Guiding Principle. 9 4.22 Market share 10 4.23 Pricing Strategy 10 4.3 Functional Strategies 11 4.31 Marketing Problems 11 4.32 HR Problems 11 4.33 Training 11 4.34 Adapting to Pakistani culture 12 4.35 Promotional strategies 12 4.4 Environmental Scanning 12 4.41PEST Analysis 12 5.0 Conclusion and Recommendations 14 6.0 References 16

Abstract
In this age of internationalization, people are able to share any kinds of food from different parts of the world, thanks to the global business of food and beverage companies. As the leading driver of global growth in consumer food service, the fast food industry is reaching new consumers continually through improved menus, dining experience upgrades and rapid worldwide expansion. As representatives of this industry and experienced multinationals, the American fast food restaurant groups like McDonald’s. The report discusses how the strategy of globalization affects large multi nationals like McDonald’s. It later elaborates upon the entry of McDonald’s in Pakistan.
Findings are based on the interview with the manager of McDonald’s branch in f-10 Islamabad. Information is collected through various sources and backed up by the literature review. The report ends with recommendations that McDonald’s should consider while planning to expand further into the global market.

1.0 Company Introduction

McDonald’s is a famous and successful fast food chain in the world which owns more than 35,000 fast food restaurants located in more than 100 different countries and regions at year-end 2011 (McDonald’s Annual Report 2011).

McDonald's Brand vision is "To be the best quick service restaurant experience". Being the best means providing outstanding quality, service, cleanliness, and value, so that we make every customer in every restaurant smile.

The McDonald’s restaurant chain is well known for its globally standardized products, service and operating policies. Respecting their strategy of standardizing worldwide, the company introduced their new branding activity “I’m lovin it” at the same time in all the business-covered countries and regions in September, 2003 (McDonald’s website, 2012). It is the first time for the group to launch their branding promotion simultaneously on a global basis, with the same brand image and the same series of advertisements. In 2004, the group re-positioned its target consumer group from family with children into teenagers and young generation with not only a uniform quality standard, but also a standardized marketing strategy (Li, 2011).
McDonald’s Pakistan is part of the Lakson Group of Companies, a leading business house in Pakistan. McDonald’s first restaurant opened its door to the people of Pakistan in September 1998 in Lahore. This launch was met with unprecedented enthusiasm from the citizens of Lahore, who are known for their liveliness, vigor and penchant for quality food. Karachi opened its first restaurant a week after Lahore. There are now 28 restaurants in 8 major cities of Pakistan. (11 in Karachi, 1 in Hyderabad, 10 in Lahore and 1 in Faisalabad, 1 in Kala Shah Kaku, 1 in Sialkot, 1 in Islamabad & 1 in Rawalpindi, Gujranwala).
Today millions of Pakistanis place their trust in McDonald’s every day- trusting the company to provide them with food of a very high standard, quick service and value for money.

2.0 Problem Statement
McDonald’s’s has had global expansion throughout the years. In such circumstances, strategies need to de devised in order to cater to the differing market needs. Entering newer markets requires strategic changes and techniques tailored for local responsiveness.
The problem statement comprises of the strategies that McDonald’s had to use when it entered Pakistan and what other changes are required in this regard.
3.0 Literature Review

3.1 The Concept of Internationalization
The concept of internationalization has evolved in the past three decades. Johanson &Vahlne (1977) defined Internationalization as a process in which the firms gradually increase their international involvement. They claimed that internationalization is the product of a series of incremental decisions.
Welch & Luostarinen (1988) discussed the “internationalization” as a dynamic concept: the process increasing involvement in international operations, both sides of inward and outward should be involved in a broader concept of internationalization. Beamish(1990) provides another comprehensive definition: “ ….the process by which firms both increase their awareness of the direct and indirect influences of international transactions on their future, and establish and conduct transactions with other countries” (Beamish 1990, pp. 77-92; Coviello & Munro 1997).
These definitions describe the concept of internationalization from a variety of dimensions. Up till now, the consensual concept of internationalization includes: (1) Internationalization is a process that includes many incremental decisions and strategies. (2) It involves various outward and inward products, service or resource transferring across national boundaries. (3) Internationalization influenced by a series of factors that come from the firms and environments. In this paper, we adopt the definition from Andersen (1997): Internationalization is the process of adapting exchange transaction modality to international markets. This definition includes both entry mode strategy and international market selection.

3.12 The Entry Mode
Based on the assumption that the internationalization is the consequence of a series of incremental decisions and the most important obstacles to internationalization are lack of knowledge and recourse, Johanson & Wiedersheim-Paul (1975) introduce the internationalization model: the Uppsala model. The model identified four sequential stages of the internationalization process: Stage 1: no regular export activities; Stage 2: export via independent representation (agent); Stage 3: sales subsidiary; and Stage 4: production/ manufacturing.
Johanson & Vahlne (Johanson & Vahlne 1977; 1990) modified this model and suggested a dynamic international model-The Basic Mechanism of Internationalization. The latter model assumes that the market knowledge and Market commitment affect both commitment decision and the current activities, which in turn influence market knowledge and market commitment. The dynamic model indicated that the firm would first target the international market with similar market environment. Both models emphasize that internationalization is a process and follows a ‘stage’ approach.
Although these two internationalization theories have been supported by much empirical and theoretical research, many scholars stand on the opposite side. Turnbull (1987) claimed that the ‘stage’ internationalization model cannot explain the internationalization in many firms; Andersen (1993) criticized that the discrepancies between the theoretical and operational level exist in these two models based on the principle of theory evaluation; Bell (1995) argued that the relevance of “stage” theories must be questioned, especially in relation to the internationalization of high technology and service firms. Gureea (2002) provided the evidence to question the ‘stage’ theory through the cases of UK Biopharmaceutical SMEs (small and medium sized enterprises).
Different from the above dynamic models which just mentioned the factors of market knowledge and market commitment, Driscoll (1995) introduced a comprehensive foreign market entry decision framework, which identifies export, contractual and investment as the main foreign market entry modes.
3.13 The Factors That Influence Entry Mode Choice
In Erramilli & Rao (1993), it is suggested that to conceptualize a firm’s desired level of different mode characteristics without considering its actual entry mode used, the efficacy of mode choice models would be improved. Based on this advice, Driscoll (1995) believe that “a diverse range of situational influences that could bear on a firm’s desire for certain characteristic of mode choice”. Some factors would influence a firm to choose a desired entry mode. He took the later factors as moderating variables. These factors were summarized in table below.

Situational Influences | Firm Factors | Firm-specific advantages | Experience | Strategic considerations | | | Environmental Factors | Demand and competitive conditions | Political and Economic conditions | Socio-cultural conditions | | Moderating variables | Government policies and regulations | Corporate policies | Firm Size | |

4.0 Findings
When an individual or a corporation first enters a new environment with diverse culture, it is generally accepted that the cross-cultural communication will create stress for them. Facing such pressure, some choose to remain their own characteristics (standardization), but others choose to be part of the new environment with their own features (adaptation). The question of whether to adapt or to standardize global markets has received great attention during the last four decades.
McDonald’s entry in Pakistan meant that certain strategies had to be tailored according to the people of Pakistan. From the mode of entry to setting a firm footing into the new market McDonald’s had to improvise and devise action plans accordingly.
4.1 Mode of entry
Franchise is the common mode of international expansion for all industries. Firstly, this forward integration spreads the risk and investment among many stakeholders. It is said that a franchise opens every eight mins in US (William, 2002, pp.100-103). McDonald’s has been successful in their international operations. Monitoring the franchisee to maintain similar standards remains a problem but good companies apply extensive rules and regulations, training opportunities and stringent quality control measures (Thompson et al., 1998, p. 313). Every activity is prescribed by the franchisor and systematic monitoring is executed to ensure no let-ups. Some entrepreneurial consultants ascribe this methodology as an imitation where tested procesi are implemented with no room for creativity or entrepreneurial experiment (William, 2002, pp. 100-103).

4.12 Autonomy in Operations McDonald’s gives autonomy to the franchisees to design their own respective ambience and décor. While “golden arches” is always present as the logo, yet the interior is diverse across the globe keeping in mind the local architecture and community feelings.
In Pakistan, firstly, people consume three meals a day; resultantly more usage opportunity exists. Secondly, family rooms are located on the second floor so that conservative families could find privacy with comfort. Similarly, children play areas are towards the corner of the building so that their usual din does not become point of annoyance for other customers.
This empowerment to franchisees is not only restricted to infrastructure but also in the product innovations. It is interesting to note that many of the new products added to McDonald’s’ menu over the decades were developed by franchisees, e.g. “Big Mac” was developed in 1968 and “Flurry” in 1999 (franchisedirect, 2012). Similarly in India a new product called “ McEgg” has been introduced since most customers are vegetarian. (Mc- Donalds India, 2011)

4.13 Conditions of Franchising. McDonald’s evaluate a potential franchisee on his/her good credit history, business experience, managerial skills and financial soundness. McDonald’s grant this mode of business in three categories. Traditional restaurants include restaurants in shopping areas and foodcourts, which are granted a lease of 20 years. Satellite locations includes retail stores, airports, universities and hospitals are granted lease for shorter durations while STD and STR format is applicable to smaller towns.
A service fee of 4% of monthly gross sales is charged from the franchisees. McDonald’s do not provide any financial assistance to the franchisee. However, training facility isks open to employees to master the specific skill sets and McDonald’s’ operating systems. A Franchise
Disclosure Document (FDD) is drawn between the two parties to cover all the related formalities.

4.14 Restaurant Ownership
We view ourselves primarily as a franchisor and believe franchising is important to delivering great customer experiences and driving profitability. At year end 2013, more than 80% of McDonald’s restaurants were franchised. Of the total McDonald’s restaurants worldwide: * Over 57% are conventional franchisees

* Nearly 24% are licensed to foreign affiliates or developmental licensees

* 19% are Company-operated

4.2 Location
McDonald’s Pakistan’s first dilemma was; should it open the initial outlet in Karachi or Lahore? Karachi is a trendsetter city while Lahore is more of a city associated with cuisine taste. Should the outlet be located n the posh localities of Clifton (Karachi) or Gulberg (Lahore), to act as “influencers” to the rest of the country market? These were double- edged questions confronting the decision- makers.
In contrast to manufacturing firms who choose the most economical location from production or convenience of distribution; a service firm will consider a trade-off between accessibility to target market, image impact factor and cost; and could ascribe more preference to any one factor. In 1998, Boating basin a seaside locality near Clifton, Karachi had turned into a food street and all eating outlets opened within the vicinity of this locality. This locality was more risk averse; Pizza Hut launched its outlet in Boating basin in 1993. The affluent residing in Clifton and Defence area, Karachi, are also the “adopters” or trendsetters in eating habits therefore opening an outlet in proximity to this locality was a natural choice.
Marketers consider social classes and status can play a decisive role in “influencing” the buying behavior patterns of target markets. These early adopters act as a catalyst in molding the opinions of other strata of market (Kotler, et al., 2006, pp. 141-147).

4.21 Mission as the Guiding Principle. In this moment of ordeal, the mission statement served as the beacon of guidance for McDonald’s Pakistan. McDonald’s wanted to project itself as an outlet for the middle-class working families where it had been successful and did not want to distort this image. The first outlet was launched in Lahore in Sept. 1998 and a week later in Karachi in the area of Nazimabad.
Defying previous strategies adopted by other chains. Lahore-outlet was located at Gulberg whose inhabitants are known for their liveliness, vigor, penchant for quality foods. On the other hand, Nazimabad is densely populated part of the city; where colleges, offices and residential colonies are located with majority of middle-class and working class as opposed to Defence or Clifton, which is the abode of affluent part of society. Nazimabad is located in the center of metropolis nearly 30 kilometers from Boating basin. The local populace accepted the openings with gusto and soon it turned out to be a booming business.

4.22 Market share
Food industry in Pakistan is around 13 percent. Today the main three players, KFC, Pizza Hut and McDonald’s have varying presence with equal perceived image. KFC has 43 outlets; Pizza Hut has 47 outlets whereas McDonald’s has only 23 outlets. However, McDonald’s has 43% market share in fast food industry. McDonald’s is quite choosy in selecting their locations. The main two metropolises, Karachi and Lahore have eight outlets each, while in the remaining five cities there is one outlet each. Approximately 50% market share of McDonald reveals that in spite of reduced presence as compared to its competitors the Chain commands the lion share reflecting more customer acceptability (Ahmed s. F., McDonald’s, 2010).
McDonald’s has been picking their outlets with adroitness always maintaining the purpose, “food with Fun”; launching outlets at Jinnah International Airport, Karachi or Drive-in outlet at Clifton beach, Karachi attracts fun seekers automatically.
The latest launch at Atrium Mall, Sadder Karachi helped them become a beneficiary to the public rush at this recreational spot.

4.23 Pricing Strategy
Although Taco Bell came up with the concept of “Value pricing”in 1998 meaning, “giving more for less”, McDonald’s adopted it more readily (Zeithaml etal., 2004, p.498). Price war as found in the beverage market equally applies to the burger market. In spite of solid reputation, the Company does not practice prestige pricing.
Premium pricing cannot be charged in Pakistan due low disposable income of the target market. It rather relies on volume of orders to give true value with right prices for products. Student discount and improving usage rate amongst non-users is its consistent policy. McDonald’s restricts itself to chicken and beef offerings but has now also included sea related items. Customers’ preference for healthier food has made them respond by adding salads and other lighter options to their menu.

4.3 Functional Strategies
4.31 Marketing Problems In little over a decade, the operations in Pakistan have not been all smooth sailing. The first threat faced by the company was to convince the public that “halal” meat or chicken is used for preparation of products.
Soon after the launch, in 2005, the bird flu had to be combated followed by,” mad cow” fear. These epidemics effected sales but did not deter the company to lose heart. Rising raw material cost is difficult to cope up without increasing the prices but had to be kept compatible with the disposable incomes of the average customers.
There is intense competition from newer formatted chains like Subway, coffee shops and grilled outlets, which are perceived healthier. McDonald’s also ventures into alliances and collaboration with local enterprises to gain impetus to co-branding. Pakistan International Airlines (PIA), Ufone and Coca Cola were some leading organizations who have varying degree of partnerships with the company.

4.32 HR Problems
Finding the right human resource compatible with the values of McDonald was another issue that required adroit handling. The workforce in fast food the world over is composed of college students of both genders. In Pakistan, this was not so; but in a short span of time this perception was corrected. Today most staff comprises of young well-groomed boys and girls who perfectly emulate a typical McDonald’s employee.
In 1990s, waitresses were unheard of in a local restaurant but the McDonald culture prevailed and educated girls ventured into this profession without inhibitions. McDonald’s requires employees to be always smiling while interacting with customers. Such a requirement strikes many employees as artificial. The Company has learnt to encourage managers to probe employees and assign troubled workers to be in kitchen rather than to the order counters (Murphy, 1994, pp. A1,A18). Today McDonald’s Pakistan has 1200 employees performing different functions. With stringent measures on Q.S.C&V and training, McDonald’s Pakistan meets the corporate standards and extends service to customers with fewer employees as compared to its competitors.
4.33 Training Most outlets serve time is 90 seconds after receiving orders and 30 minutes for home delivery anywhere in Karachi. This is duet result-oriented training. It may have been difficult to emulate the same “ketch up in the veins of employees”, due to lower literacy rate and different set of attitudes. The training at McDonald’s focuses on three areas, cognitive, knowledge learning and behavior modeling. Two creative methodologies are used for training; Assertive training (AT) where employees inculcate this important trait in life style and secondly Andragogy learning method based on a verified system of adult learning. The most important aspect of training is displaying friendly and a caring attitude towards customers. (Ahmed et al., 2010).
4.34 Adapting to Pakistani culture
Apart from putting forward the concept of halal food, McDonald’s had to alter promotional as well as products suited to Pakistani people. Islamic republic of Pakistan is populated my masses from the Muslim community. These cultural differences called for desperate measures.
In the holy month of Ramadan, for instance, the restaurant is closed during the month. It opens for one hour prior to aftaar and closes after sehari time. Similarly, offerings in Pakistan are more spicy as compared to the rest of the countries in order to cater to the tastes of Pakistani people. For instance, masala fries are offered in Pakistan because people here prefer spicy food. Moreover, extra large items (drinks, fries etc) are not offered in Pakistan as most people do not prefer those here.
4.35 Promotional strategies
In order to create brand awareness among the Pakistani people, McDonald’s used television commercials in Urdu language that portray the image of the food chain as being a family brand. Its associations and alliances with brands like Ufone allow it to reach the masses at a larger scale.
The advertisements make use of celebrities that people can relate to. Actors like Hamza Ali Abaasi; singers like Junaid Khan are made part of the adverts so that the target audience connects with them.
On the other hand, McDonald’s in Pakistan had to emphasise the fact that the meat used in preparation of burgers is completely halal. From TV commercials to print ads, the concept of halal food was highlighted.

4.4 Environmental Scanning
4.41PEST Analysis
Political
The international operations of McDonald’s are extreme under influence of a policy of the separate state put into practice by each government. For example, there are certain groups in Pakistan which demand the acts of governmental power concerning medical values of meal of fast foods. Elements like health and safety laws, employment practices are noticed in state control of licensing of restaurants in corresponding states.

Economic
Economic downturns and changes in the inflation rates affect the disposable income of a common Pakistani. Thus, such economic changes alter the purchasing power of the customer. This greatly affects the spending pattern of the people that might delay dining out at places like McDonald’s in order to save expenses.
People with low disposable incomes consider it a luxury to eat at places like McDonald’s in Pakistan.
Social
When McDonald’s entered in Pakistani market, people were not very fond of fast food. A change in the lifestyles overtime helped the company to grow and to increase its profits. The issue of halal food was dealt with through massive advertising campaigns
However, a negative aspect o social factor happening in Pakistan is the is sometimes the fact that many times anti- American feelings rose for different reasons that result in boycotting American products.
Technological
Pakistan is a developing country and new technology and gadgets are always welcomed. McDonald’s has an added advantage in this regard as the manufacturing process is mainly automated. The use of computers and smart cashiers has allowed customized data base management that results in delivering a quicker service.

5.0 Conclusion and Recommendations
Pakistan is a country with a long-established history. Although after the reform and opening-up policy, many aspects of Pakistani culture are subject to changes and exotica is penetrating into people’s daily life, Pakistani cultural value systems have so deeply rooted in people’s minds that it can be difficult to make any major or massive changes in a short term.
For example, some values such as taste of food or contents of meals are deeply embedded in culture, and they can be a typical embodiment of a specific culture. Therefore, no matter how intensive the external force is, it will still keep its traditions to some extent. These profound values and traditions will put all the foreign companies that hope to expand in Pakistani market under pressure and force them to consider cross-cultural adaptation process, if they want to success in this market in the long run.

On the other hand, with the advances in science and technology, “culture as well as society, which are more likely subject to fluctuations, seldom remain constant” (Samovar, 2000). The younger generation do not merely copy the culture accumulated by their ancestors, instead, they will add something new to the long time developed material and spiritual embodiment of a certain culture. Facing the trend of globalization, Pakistani people nowadays are being “westernized” gradually by studying and accepting the new culture. In addition, education such as English teaching plays a profound role in initiating changes of culture by influencing people’s thinking patterns and preferences. The western culture, especially American culture which is recognized to be influential all over the world, is playing a profound role in the evolution of global culture.

Facing the wrestling of both sides, McDonald’s carries out its own cultural adaptation projects and take full advantage of the influence of globalization and localization at the same time. The intercultural transformations supported by menu, food names, advertising and etc that have been mentioned above, have drawn Pakistani customers’ attention and identification to different extent, which to a large scale help Pakistani customers cross the traditional boundaries both in conceptions and in reality.

To sum up, what is suggested by this study is that, if a foreign fast food brand would like to enter the Pakistani market and keep prosperity, cultural adaptation is an important issue that one needs to pay highly attention on. If taking the case of McDonald’s as reference, some of the consideration could be: * The language adaptation which includes the name of brand and products in order to keep a good communication and understanding between the company and the consumers; * Good design of the product portfolio which matches the Pakistani eating habits; * Advertising and public communication should be designed to attract the attention of target market in order to meet the consumers’ interest; * Improve daily service offered by well-trained local employees, as well as Innovation of the product design which meeting the current market’s taste.

6.0 References

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