CASE STUDY of mcdonald's Part One: Executive Summary Introduction and Challenge McDonald's is an ever-growing ever-growing corporation that has penetrated markets throughout throughout the world, while consistently producing profits for shareholders. The birth of McDonald's occurred in 1941, when Dick and Mac McDonald opened a restaurant with drive-in service (Upton, 2005). One distinguishing factor that these founders incorporated was the "Speedee Service System," an operational strategy that emphasized detailed attention to equipment, processes, and uniformity. This birthmark of consistency still penetrates the company and has been lauded as a primary reason for overall success. As of 1991, the operations manual surpassed 750 pages of intensely meticulous directions for making the branded McDonald items customers enjoyed. As McDonald's tries to maintain its supremacy as the fast-food industry leader in the twenty-first century, they are faced with the following dilemma: how should McDonald's adapt its operations strategy to respond to the increasing demand for flexibility and product variation.
The Business and Industry Industry Initially, McDonald's approached several of the central food processing suppliers in order to satisfy the high demand for various ingredients. These companies declined the offer, not wanting to adhere to their intense specifications. However, small suppliers gambled on the new upstart and in return return McDonald's created a whole new set of institutional vendors. Attention to detail has made McDonald's one of the most successful corporations in the world. While the small McDonald's menu has slowly evolved over time, the operational focus of consistency has been maintained. Two major menu modifications that provided significant advantage are: (a) the introduction of the breakfast menu in 1976, and (b) the McCafe? line in 2009. In the 1980s, the breakfast line provided 15% of overall
restaurant sales and the McCafe? line currently currently adds well over $100,000 for individual store sales (Kowitt, 2011). McDonald's competes in the quick-service restaurant restaurant industry and key rivals include Burger King, Subway, Taco Bell, as well as larger establishments such as Chili's and The Olive Garden. Success among rivals has been achieved by adherence to "limited menu, low prices, and fast service" (Upton, 2005). McDonald's is now attempting to rebrand itself as socially responsible and health conscious. Even though the McLean failed in earlier years, the salads and grilled chicken items remain as staples, and environmentalism plays a growing role in company policy. McDonald's embraces an operations strategy of extreme uniformity across all locations. The four main areas that make up much of the operations strategy are product enhancement, maintaining supplier relationships, tailored equipment, and training. In addition, franchising is a major factor and by 1992 McDonald's made 39% of revenues from 3,500 domestic franchisees. Conclusion and Outlook
Uniformity, training, differentiation, and franchising are integral to the future success of this company as they strive to maintain their dominance in the industry. For McDonald's to continue its dominance as a worldwide mega corporation, it must redefine the fast food industry or employ a novel operational strategy to diversify into adjacent markets. If CEO, Jim Skinner, has anything to say about it, he will continue his life-long career at the company, while continuing to surpass speculative criticism and suggested limits. One line that espouses his somewhat contrarian attitude and is in response to the volatility of market conditions is, "when customers have more to spend, they'll spend it at McDonald's" (Kowitt, 2011). Part Two: Identification Key Challenge & Decision Making As McDonald's tries to maintain its supremacy as a megacorporation in the twenty-first century, they are faced with the following dilemma: how should McDonald's adapt its operations strategy to respond to the increasing demand for flexibility and product variation. While competing rivals focus on cost-only approaches, product variations, and
"have it your way" strategies, McDonald's concentrates on long-term consistency as opposed to short-lived methods. At the same time, the company realizes that the increase in competition warrants revisiting some of the stringent practices that have provided uniformity. Operations Strategy Process-Based Capabilities (Beckman & Rosenfield, 2008) are incorporated by McDonald's, as uniformity and commitment to processes remain paramount to operations. One primary challenge is determining how much structural flexibility the company will incorporate so that they can continue to dominate the industry against all rivals. The McDonald's menu evolution has necessitated challenges to the historical norms and is evidenced by the introduction of novel menu items and the McCafe? line. With each novel item introduced, years of research and preparation are required to ensure process uniformity through the production of new equipment, addendums to manuals, additional training, and marketing campaigns. In short, the expansion of McDonald's menu affects every location and adds complexity to the systems process. Operational deviation occurred during the creation of the McCafe?
line, which led to the expansion of McDonald's market and created new rivals such as Starbucks. Customer Needs Availability: with respect to restaurant hours, locations, and product offerings Cost: Competitive pricing (especially related to the McCafe? line) Innovativeness: Health conscious offerings and menu expansion Environmental performance: Social responsibility and environmental awareness Quality: Fast delivery of quality food Business Context The fast-food industry appears to be growing with the increase in marketing campaigns that directly target McDonald's. As the industry leader, more competition will undoubtedly arise as others strive to dethrone the mega-corporation. McDonald's must address these challenges by constantly reevaluating their operational strategy and business objectives, in order to stay ahead of the curve, and remain profitable in difficult economic times. The McDonald's business model must embrace innovation, while maintaining their unique and well-established brand, to increase market share and
continue to out produce its competitors. Part Three: Analysis and Evaluation Competitive Situation The competitive situation for McDonald's remains intense as evidenced by the expansion of Subway restaurants, recently surpassing the number of McDonald's restaurants worldwide (Pepitone, 2011). While McDonald's still maintains financial superiority over Doctor's Associates, the parent company of Subway, McDonalds must acknowledge this competition from Subway and others, and make immediate adjustments to maintain market superiority. This challenge is addressed in Part three of the case study where options for McDonald's expansion into new market segments are considered. According to a 2010 article, McDonald's holds a 19% market share within the fast-food industry, with the next largest companies being Doctor's Associates, Inc. at 10 % and Yum Brand's Inc. closely behind at 9% (Muehlhausen, 2010). This chart displays the top seven companies within the industry relative to the remaining companies grouped together as other. Yum Brand's Inc. includes Taco Bell, Pizza Hut, and Kentucky Fried Chicken. With respect to all
fast food rivals, the recent recession created a boost to sales since many individuals opted to frequent these establishments, providing an inferior good (Pepitone, 2011). Financial Analysis* Gross Margin: The dip represents higher cost of goods sold relative to revenues. Higher gross margin is more profitable. Revenue: McDonald's has experienced consistent increases since 1995, except for a slight decrease in 2008. Net Income: McDonald's has experienced turbulence due to excessive total operating costs. Operating Margin: McDonald's is currently experiencing high operating margins and higher profits (excluding interest and income taxes). Five Decision Categories Factors Cost: McDonald's invoked a cost strategy with the inception of the Value Menu in 1991, resulting in a reduction of prices by an average of 20%. The costs for these products seemingly remained the same, but the decrease in pricing allowed for an overall increase in sales. Keeping company costs low is an effect of their emphasis on systemic processes and uniformity. Quality: McDonald's spends years of research for process development, trial runs, and equipment manipulation in order to provide a quality product as
compared to rival companies. Regardless of rivals, McDonald's prides itself on maintaining a high level of intrinsic quality as evidenced by their QSC qualities of Quality, Service, and Cleanliness. Availability: With over 32,000 McDonald's locations worldwide, McDonald's has committed itself to location availability. Food availability is important as the systematic process necessitates adequate inventories and consistent production of menu items. Features/Innovativeness: An example of innovativeness is that McDonald's is the world's largest owner of corner lots worldwide, buying up these properties so that they can lease them back to franchisees at a profit (Muehlhausen, 2010). Environmental performance: McDonald's partnered with the Environmental Defense Fund in 1990 with the commitment to achieving sustainable solutions and improving upon environmental innovation (EDF, 2010). Core Capabilities Impact Innovativeness Prides itself on paving the way for others in the quick service industry. Fresh ideas are encouraged from all levels, suppliers to franchisees. Quick service operating system Provides a consistent customer experience with regard to products
consumed and process uniformity among all outlets. Real estate research and development Much of the company's revenue is generated from rent on franchised locations. Careful selection ensures branding reinforcement and high volume. Employee training and professional growth Creates opportunity for advancement and promotes high morale while keeping operational costs low. Supplier relationships Maintains high quality and product consistency. Quality Improves customer loyalty and retention. Product development Enables wide scale rollout of new products that appeal to consumers. Timing and Cost of Recommended Actions Since McDonald's currently has a very large amount of capital, they are financially able to invest in operational strategies aimed at increasing market share and increasing their superiority within the fast-food industry. Major operational decisions must be addressed now to identify how to best use this capital in order to maintain competitive advantage and corporate dominance in the industry. The purposed recommendations below should be considered as soon as possible, with the understanding that ample time will be given to research and development, marketing assessments, and overall scenario evaluation. McDonald's must maximize their reward potential while limiting risk; however, at present the mega-company can afford to take greater risks than
others. Part Four: Evaluation of Alternative Recommendations The following are three operational strategy proposals for McDonald's: 1The expansion of stand-alone McCafés offering coffee, beverages and snacks. 2Introduction of the McFit campaign, rebranding McDonald's as health conscious. 3Creation of the McToy exhibit, to highlight vintage Happy Meal offerings. McCafé Expansion The success of the McDonald's McCafé line of products warrants consideration of expansion to stand-alone McCafés. These cafés will cater to the Birkenstocks with socks crowd and make Starbuck's cringe for over charging customers for their frilly, frou-frou coffee products. The expansion of the McCafé will involve designing a new café style restaurant with the following components: (a) Two versions of the café' will be designed. One café will cater to areas with heavy pedestrian traffic and the other will provide a drive-through service option. (b) Image and design of the new café style restaurants shall provide interior space that is warm and inviting, and provide comfortable chairs and tables for small groups of people. (c) Design of the new café shall provide for electronic and hi-tech
amenities such as wi-fi service, news portals with touch screen access, streaming music, and order ahead service via email or text message. McFit Campaign McFit is an innovative marketing and operational campaign to promote McDonald's healthy menu items. This will be started domestically with the emphasis on rebranding McDonald's as a healthy alternative to the highly criticized historical image and to further distinguish themselves from industry rivals. The McFit campaign will involve the following components: (a) partnerships with major health club organizations such as Gold's Gym or 24 Hour Fitness, (b) creation of McFit quick service restaurants located within these newly partnered establishments serving only the healthier menu selections from the product menu and McCafe line of offerings (with the possibility of adding some additional menu items reflective of post workout snacks and beverages), (c) a nationwide rollout plan to include fitness activities for both children and adults (i.e. 1k and 5k races, children's fitness competitions, etc…) to be coordinated regionally throughout the states, (d) comprehensive marketing
strategy partnering with professional athletes and athletic organizations, and (e) strong emphasis on the nutritional value of the healthy line of products sold at traditional and newly opened establishments. McToy Exhibit The McToy exhibit will partner with McDonald's USA First Store Museum and the more than 140 Smithsonian Affiliates worldwide to showcase past decades of Happy Meal toys. This exhibit will contain some of the most requested giveaways including the McDonalds Easy Bake Oven, Star Wars action figures and the 101 Dalmatians collection. This trip down memory lane will be an avenue for parents to relive memories with their children as a shared experience. McDonald's food will be available in the museum restaurant, during this exhibit. Happy Meals will be available at museums with some of the most famous giveaways, including Hot Wheels, Star Wars action figures, and Lego sets from the 1984. To promote this campaign, vintage toys will be reintroduced into the current Happy Meals. Decision Factors All three recommendations provide the potential to expand and
improve the McDonald's public image, distinguish the company further from its competitors, and increase brand recognition into new markets. The recommendations provide the potential to reach new markets by promoting subsets of the extensive McDonald's menu to specific market segments that have normally been outside the traditional McDonald's image. The following decision factors were used when assessing the three recommendations: (a) Costs associated with the recommendation relative to the potential for further expansion to new market segments. (b) Quality product promotion and advancement of McDonald's menu items and image. (c) Increased availability of McDonald's products to new market segments. (d) Innovative and forward thinking ideas or promotion of new features. (e) Further promotion of McDonald's as a socially responsible organization. Strengths and Weaknesses In order to demonstrate the method used in determining which campaign to propose, we used the above-stated decision factors and identified the potential benefit of each strategy as weak (high risk,
low reward), moderate (moderate risk, moderate reward), or strong (low risk, high reward). These rankings illustrate comparisons made during the decision-making process. McCafé expansionMcFit campaignMcToy exhibitCostStrongStrongModerateQualityModerateStrongWeakAvaila bilityStrongStrongModerateInnovati venessModerateStrongStrongEnvironmental/Social ImpactModerateStrongModerate Part Five: Recommendation and Plan of Action After careful consideration of all three recommendations, we believe that the McFit option provides the greatest potential for market expansion and positive brand promotion. We believe that this strategy will positively reshape the McDonald's image based on the following: Cost: By providing access to a smaller subset of the McDonald's menu the restaurants can be more streamlined, thus reducing the cost of opening new establishments as compared to full-sized McDonald's restaurants. This cost reduction, revenue potential, and new market penetration makes the McFit option very attractive. Quality:McDonald's prides itself on quality and has developed several healthy menu options, yet still maintains a negative image as evidenced by the recent release of critical documentaries. McFit will provide an avenue for McDonald's to rebrand the company as health-conscious. Availability:By teaming with fitness centers McFit will be available to a new market segment outside
of the historical norm. Recent studies show that young adults are opting away from traditional families and engage in an active, healthy lifestyle. This is our new target audience. Innovativeness: McFit introduces exciting avenues for McDonald's to promote health and fitness to their customers. This campaign will be a major disruption in the fast food industry and create a competitive advantage that many will try to imitate. By moving now McDonald's can establish leadership and maintain this competitive advantage for years to come. Social Responsibility:Health and fitness to customers are ideas worth promoting. McFit will have great impact with respect to social responsibility and will position McDonald's as a health-conscious organization. Not only will their pubic image be improved, but the image of their customers will improve to be the sleek, hard bodied McHotties that frequent fitness centers. Summary of Benefits and Risks Benefits of initiating the McFit program are great with respect to the above areas of cost, quality, availability, innovativeness, and social responsibility. McDonald's has previous attempts at rebranding themselves as health conscious with the failed introduction of the McLean burger and with the introduction of salads. However, minor menu adjustments do not compare to the enormous impact that this transformational strategy will have once implemented.
Risks are involved with any operational shift in business. Potential risks involve the following: (a) health club organizations may deny partnering with McDonald's, (b) the investment in McFit establishments could produce very little revenue or return on investment, (c) the public may view this marketing campaign as disingenuous due to the historical unhealthy image, and (d) communities may not embrace the nationwide rollout unless major incentives are provided.
In response to these potential risks, how can anyone possibly blame McDonald's for attempting to invest capital in programs promoting good health? Health clubs would be wise to strongly consider partnering with one of the most successful companies in the world. For them, the worst-case scenario is that the project fails and they go back to business as usual. Sure, the public may not completely buy into the strategy since McDonald's would still have the traditional stand-alone stores with the same menus. However, this would not likely deter normal customers from McDonald's and the potential upside for bringing in new customers is worth the risk. Lastly, this proposal is simply a good thing to
do, regardless of risks. McDonald's would be wise to consider promoting McFit as they have done with many of their charitable events and promotions. Do something good, stay innovative, and employ a strategy that has minimal capital investment (when compared to their financial situation) with a tremendous potential for explosive growth. Implementation Outline Phase 1: Marketing department will conduct a detailed assessment to determine supply and demand, gauge the reaction of health clubs and the public at large, conduct polls and focus groups to further develop specific objectives, and create an initial marketing campaign. Phase 2: Business development department will create a business plan with a clear budget for the initiative, taking into consideration the risk-reward factors. Furthermore, they will define milestones, identify success/failure factors and indicators, and establish a specific timeline for implementation of strategy. Phase 3: Research and development department will designate innovative teams, combining employees from all levels of the organization to evaluate the
nutritional value of present and future offerings. These teams will also speak with healthcare and fitness professionals to create possible additional menu items geared toward the McFit establishments. Phase 4: Once the business plan is accepted, business development management will approach major health club chains and celebrity athletes to form partnerships with those who are most receptive to the strategy and have the most to offer. The McDonald's legal team will ensure that all partnership agreements are negotiated and signed. Phase 5: Marketing will designate regional teams to engage community groups to establish nationwide fitness activities to celebrate the introduction of McFit. Marketing must ensure that the press is made aware of activities and coordinate a nationwide onslaught of commercials, interviews, and news buzz. Phase 6: Once the infrastructure is in place and all legal and promotional campaigns have been established, McDonald's will commemorate the McFit campaign with simultaneous ribbon cutting ceremonies at key locations throughout the country. The regional directors will work collectively to
ensure that McFit establishments open in timely fashions surrounding the nationwide introduction. Phase 7: McDonald's will utilize their stringent measures to monitor this campaign and make adjustments along the way. While this project is geared toward social welfare, the bottom line is that McDonald's must financially benefit from McFit in order to ensure lasting success. Part Five: Conclusion and Competitive Advantage Impact to the Business McDonald's has much to gain with the acceptance of the above innovative proposal. Minor attempts to rebrand the company as health-conscious have provided little social support, even though they continue to experience economic growth. This transformational shift will be impossible for the public to ignore and will establish the company as not only successful, but even more socially responsible than they already are. Adhering to the above recommendation is akin to the partnership that McDonald's made with the Environmental Defense Fund twenty years ago. Impact to the Customers The honest truth is that many of the customers who frequent McDonald's do not typically reflect the
healthiest of individuals. This proposal not only promotes better lifestyles, taps into new segment markets, and helps to improve the nationwide obesity epidemic, but it also encourages improved lifestyle changes for existing customers. While the traditional menu will remain as an option in regular establishments, the partnerships with health clubs will undoubtedly impact the less healthy customers. McDonald's would likely desire to be known as a company that enhances the lives of its customers. Impact on Competitors Competitors stand the most to lose from this proposal. Many of the rivals are unable to develop the financial capital needed to incorporate this type of grand-scale campaign. The story of Subway teaches us that the public is becoming more health conscious and that the fast-food industry has a demand that is not being met. McDonald's has an opportunity to surpass all other rivals by unveiling this comprehensive approach to improving lives and encouraging good health. Many industry competitors will be left in the dust and categorized as uncaring and socially irresponsible. The ones that try to imitate McDonald's will simply be behind the curve as opposed to the prime mover.
Competitive Advantage Competitive advantage assumes distinguishing characteristics and practices by a company that are difficult to duplicate and are unique within the industry. By all accounts, the proposal offered within this case study will undoubtedly provide McDonald's with a great competitive advantage within the fast-food industry. While burger joints and sandwich shops are attempting to chip away at the mega-company's superiority, McDonald's will incorporate innovative ideas and offerings in order to continue growing at their desired rate. This proposal offers the unique qualities of high reward, distinguished factors from industry rivals, enhanced public image as health conscious, and allows McDonald's to invoke transformational change both within the industry and with the public at large. How do you continue to grow a behemoth? You do so by enhancing the overall health, strength, and stamina one McHottie at a time.
References Beckman, S. & Rosenfield, D. (2008). Operations strategy: competing in the 21st century. New
York, NY: McGraw-Hill/Irwin. EDF. (2010). Environmental Defense Fund. Retrieved from http://www.edf.org/news/mcdonald%E2%80%99s-andenvironmental-defense-fund- mark-20-years-partnershipssustainability. Kowitt, B. (2011). Why McDonald's wins in any economy. Fortune, 164(4), 70-78. Muehlhausen, J. (2010). McDonald's business model ten times better than Hardee's?. Business Model Institute. Retrieved from http://businessmodelinstitute.com/mcdonald%E2%80%99sbusiness-model-ten-times- better-than-hardee%E2%80%99s/. Pepitone, J. (2011). Subway beats McDonald's to become top restaurant chain. CNNMoney. Retrieved from http://money.cnn.com/2011/03/07/news/companies/subway_mcdona lds/index.htm. Upton, D. (2005). McDonald's Corporation (Abridged). Harvard Business School, retrieved from http://management.fortune.cnn.com/2011/08/23/whymcdonalds-wins-in-any-economy/.
