McDonald’s Competitive Priority Cost as a Strategic Advantage

As the changing business environment force firms to respond effectively, one of the challenges they face is gaining and developing a competitive advantage. According to Lee and Yoo (2021), competitive advantage refers to the extent to which an organization can assume a defensible position over its competitors. Entities can use competitive priorities to create, develop and maintain competitive advantage. These competitive priorities are dimensions in which the firm wishes to compete. For instance, competitive priority cost occurs when a firm can manage effective production costs. An example of a firm that employs competitive priority cost is McDonald’s which has always pursued a cost leadership strategy and excelled in cost control.

McDonald’s builds a competitive advantage through cost minimization as its processes are designed to maximize efficiency, minimize costs, and ensure profitability despite the use of competitive selling prices. As illustrated by Ma (2021), McDonald’s cost of goods sold (COGS) has been on a downward trend in recent years. Ma notes, “The year-on-year decrease rate of its COGS was 8.37%, 18.17% and 19.15%, respectively. Despite a slowdown in the fall in the cost of goods sold from 2018 to 2019, it is still on a downward trend and has managed to fall below $10,000 million” (p. 2). As indicated in this case, this strategy aims to significantly reduce the cost while keeping the high quality to occupy the industry’s dominant position.

To achieve this strategy, McDonald’s always looks for cheaper real estate as restaurant sites, uses a unique model called the Hourly Labor Guide (HLG) to determine the right number of employees to hire, and employs a unique energy monitoring system called Dotsystem to avoid unnecessary energy waste by machines. Prabhu (2019) notes that McDonald’s runs on low margins in the most competitive places, and has a strategy of offering its products at low prices. Its division of labor allows the firm to recruit and train freshers rather than trained cooks while relying on just a few managers. These savings in various processes across the firm allow it to offer foods for low prices.

The four general competitive priorities are cost, quality, time, and flexibility. On cost as a competitive priority, the focus is on a low-cost operation which also enables the firm to charge low prices for its products while maintaining high product quality. McDonald’s is one of the most popular firms in the fast-food industry that has successfully incorporated competitive priority cost to its competitive advantage. By hiring non-trained cooks, having few managers, and constantly decreasing the cost of goods sold, the firm can charge low prices for its meals. This priority cost has become a pillar of the firm’s strategic advantage, making it one of the largest fast-food companies by revenue.

References

Lee, S., & Yoo, J. (2021). Determinants of a Firm’s Sustainable Competitive Advantages: Focused on Korean Small Enterprises. Sustainability, 13(1), 346. https://doi.org/10.3390/su13010346

Ma, H. (2021). The Impact of Competitive Strategy on Profitability in the Context of COVID-19: A Case Study of McDonald’s. E3S Web of Conferences, 235, 03005. https://doi.org/10.1051/e3sconf/202123503005

Prabhu, T. (2019). THE Art OF STRATEGIC MANAGEMENT: A Set of Strategies for the Organization that Will Enable it to Achieve Better Performance. NestFame Creations Pvt Ltd.