Case Study Solution on Attractiveness of the fast food industry from the perspective of McDonald’s Corporation

TASK ONE

After reading the case study McDonald’s Corporation, prepare a report on the attractiveness of the fast food industry from the perspective of McDonald’s Corporation, an American fast food company founded in California, United States, best known for its hamburgers, cheeseburgers, french fries, soft drinks, wraps, and desserts now faces the challenges of increased competition. You should prepare your answer in a report format and comment on:

·         The strategic issues that McDonald needs to address

·         The core competencies of McDonald

·         The business model of McDonald? Also, discuss on the various strategies/techniques how McDonald earns money?

The strategic issues that McDonald needs to address:

  • Providing product that balances quality, speed, and affordability. Complaints about speed of service have “increased significantly” in recent years, with the McDonald’s service experience described as “chaotic.”
  • Innovating the menu without creating unnecessary menu scope creep.
  • Responding to competitive threats and other quick-service restaurants such as Wendy’s, Burger king, and Yum! Brands’ Taco Bell without losing the company’s core identity. McDonald’s is roughly twice the size of its next largest global competitor (all three Yum! Brands combined), but has slightly fewer outlets.1 It controls almost half of the U.S. hamburger market, which is more than three times larger than the market share held by either Wendy’s or Burger king. Improving public perceptions of the McDonald’s brand. In July 2014, the Big Mac earned the dubious distinction of being America’s worst hamburger, placing last out of 21 in a study by Consumer Reports.2
  • McDonald’s also ranked lowest among peers in the 2015 American Customer Satisfaction Index. Fast food restaurants overall dropped 3.8 percent, but McDonald’s fell by six percent from 2014, holding firm in the last spot.3
  • Becoming more “culinary inspired” and to simplify food labels by reducing the number of preservatives.4 There are still 19 ingredients in the French fries McDonald’s serves in the United States, compared to just five in Great Britain.5
  • Prevention of complacency, in spite of many years of relative success. Increasing its appeal to millennials. Millenials are consistently choosing “fresh and healthy” over “fast and convenient” and “McDonald’s is having trouble convincing them it can be both.6 McDonald’s has to find interesting and engaging ways to share that information with them, not old-fashioned corporate lecturing.7
  • Defining a clear vision of what it wants to be and a plan for how to get there.
  • Resolution of the case that the National labor Relations Board’s (NlRB) general counsel has filed against it claiming that the company has enough control over franchise operations to be considered a joint employer.
  • Resolution of serious staffing issues if it is to improve customer loyalty. An internal survey results one out of every five customer complaints was about “rude or unprofessional employees.8

The core competencies of McDonald Corporation’s

Core competencies of Mc Donald’s can be analysed using VRIO framework.9

Value:

Various resources and capabilities that add value and make it competent in market include:

  • Mc Donald’s has a strong brand image all around the globe. Branding helps it to generate huge revenue and promote its marketing efforts more efficiently.
  • Mc Donald’s continuously follows an aggressive technology upgrade to allow Starbucks-like interactivity to both smooth out operational waiting times and improve the customer experience.
  • As a direct competitive response to the “better burger chains,” McDonald’s is offering “Build Your Own” tablets where customers design their own sandwich from over 30 choices of meats, toppings, and buns. This presents an interesting conundrum for a quick-serve restaurant that generates roughly two-thirds of its revenue from drive-through customers.10
  • To increase its appeal to millennials, Mc Donald’s has hired Google executive to lead McDonald’s “Experience of the Future,” which includes an improved social media presence, development of a Smartphone app, and testing of mobile payment systems.11

Rare

Resources and capabilities of Mc Donald’s which are rare include:

  • Mc Donald’s share has given a 56.26 % return to its shareholders in a period of two years from July 2015 to July 2017 as compared to Dow Jones index return of 21.91 % for the same period.
  • McDonald’s is roughly twice the size of its next largest global competitor (Wendy’s, Burger king, and Yum! Brands’ Taco Bell, all three combined). It controls almost half of the U.S. hamburger market, which is more than three times larger than the market share held by either Wendy’s or Burger king.
  • In addition to curtailing antibiotic use in its U.S. chicken supply, McDonald’s is now selling dairy products from growth- hormone-free cattle. The company has also pledged to examine its product ingredients and review its food preparation procedures. Its goal is to become more “culinary inspired” and to simplify food labels by reducing the number of preservatives.
  • McDonald’s is giving customers more choice in what they eat is by giving franchises more freedom to offer locally relevant menu items. Local restaurant operators can choose items from the company’s global pipeline and adjust them as needed to suit local tastes. Managers will also be granted more freedom to run their own promotions to increase store traffic.12

Costly to intimate

List of capabilities and resources of Mc Donald’s which are costly to intimate include:

  • In 2017, McDonald’s operated a total 37,000 restaurants globally, with 14,300 of them in the U.S. One of Easterbrook’s first major moves was to propose all-day breakfast in all U.S. restaurants, the company’s biggest initiative in six years.
  • Mc Donald’s is present in more than 120 countries which enables its ability to maintain the business in most efficient manner.
  • In China and Hong kong, the company recently sold an 80 percent stake in their 1,750 restaurants to Citic (state-owned investment group) and the U.S. private equity firm, Carlyle.13 They are currently looking for these partners to open an additional 1,500 stores in China, Hong kong, and korea.

Organized to capture Value

Resources and capabilities of Mc Donald’s which are organized in a structured way tp add value to organisation include:

  • Mc Donald’s has strong supply chain management embedded with advanced technology to bridge the gap in the system and serve the customers to the best.
  • To free up space for  new offerings, the company has planned to phase out underperforming features such as the snack wrap and reduce the number of extra value meals. McDonald’s menu has swollen to over 120 items. A greater variety of menu options helps to draw new customers into stores.
  • The company has launched a video series entitled “Our Food, Your Questions,” demonstrating how McDonald’s food items are made. The company has responded to 40,000 questions and that the increased transparency has been well received. In June 2015, Mc Donald’s has hired Robert Gibbs, former White House Press Secretary under President Obama, to serve as executive vice president and global chief communications officer, and Silvia lagnado, previously with Bacardi ltd, to serve as head of global marketing to take over the company’s media affairs.
  • The company grants employees the ability to accrue up to five days of paid vacation annually after one year of employment.

McDonald Corporation’s’ business model and its revenue streams

Mc Donald’s management philosophy is three-legged stool:

One leg is the parent corporation,

The second leg is the franchisees, and

The third is McDonald’s suppliers.

It has built an ever-larger network of store owners and an integrated supply-chain management system. Many new menu items, such as the Big Mac and Egg McMuffin, have been developed by the franchisees. It encouraged local owners to be entrepreneurial as long as they maintain the company’s four main principles: quality, service, cleanliness, and value. Because of the volume of McDonald’s business, it found many supply partners willing to adhere to his high standards.

McDonald’s both owns and operates its own restaurants, as well as, franchisees them to others. The large majority of restaurants are franchised (85 percent) and McDonald’s makes money by leveraging its product, fast food, to franchisees that have to lease properties, often at large mark-ups that are owned by McDonald’s. McDonald’s runs a franchising business model under which it trades access to its brand, its operating infrastructure, and its resources to restaurant operators for a hefty price. These entrepreneurs pay an initial fee at the start of their franchise. They also send in an ongoing royalty that’s based on a percentage of their sales. Finally, franchisees pay McDonald’s rent for the property that, by the way, can’t drop below a certain rate and is set on 20-year terms.

There are three primary franchise ownership structures:

 1) Conventional franchisee,

2) Developmental license, and

 3) Affiliates.

Under a conventional franchise agreement, the company typically owns the land and building, and leases the location to the franchisee. The franchisee pays for “equipment, signs, seating and décor.” As the equipment depreciates or new facilities or food preparation processes are required, the franchisee is expected to reinvest in the business. McDonald’s also co-invests into specific strategic initiatives to motivate franchisees to adopt changes. Franchisees pay rent and royalties based on a percentage of sales, with specific minimum rent payments and initial fees paid upon opening a new restaurant or acquiring a new franchise. The typical franchisee lease is 20 years.

The specific conditions of the franchise agreement vary on the owner’s experience, credit capacity, and the local legal environment. Franchisees can vary significantly in size.

The largest franchisee has a developmental license for 2,200 restaurants across latin America and the Caribbean.14 On the other end of the spectrum, some franchisees own and operate a single location.

TASK TWO 

· Your task is to analyse McDonald Corporation’s external environment and prepare:

· The trends in McDonald’s’ external environment that are likely to have the greatest impact on the company’s ability to sustain a competitive advantage?

The trends in McDonald’s’ external environment that are likely to have the greatest impact on the company’s ability to sustain a competitive advantage

Mc Donald’s external environment can be analysed using PESTEL analysis frameworks that have the greatest impact on its ability to sustain a competitive advantage.15

Political

The turnover in fast food industry is very fast due to high stress and less pay.16 Activists lobby for a larger pay raise. The National labor Relations Board’s (NlRB) general counsel has filed a suit claiming that Mc Donald’s has enough control over franchise operations to be considered a joint employer. McDonald’s raise pay to at least $1 more per hour than the local minimum wage will be enough to attract and retain motivated workers. The company also granted employees the ability to accrue up to five days of paid vacation annually after one year of employment.  

Economical

The unemployment rate has been cut in half from its 2009 peak at 10.0 percent to just 5.1 percent in 2015, and per capita real disposable income is near record highs.2 For the first time ever, American spending on dining out exceeded grocery sales in April 2015. According to the Restaurant Association, millennials tend to favor quick service, deli, and pizza joints over more traditional casual and high-end dining; ethnic foods are also viewed as new and interesting. Mc Donald’s is giving customers more choice in what they eat is by giving franchises more freedom to offer locally relevant menu items. McDonald’s has customised its products where customers design their own sandwich from over 30 choices of meats, toppings, and buns.

Social

Obesity-related health care expenses in the United States total $663 billion annually. Beef still comprises the highest proportion (58 percent) of meat consumed in the United States, but health-conscious consumers are increasingly shifting toward poultry and other lean meats. Concerns over the increase in antibiotic-resistant bacteria have led to calls for the elimination of sub therapeutic antibiotic use in meat animals. McDonald’s has stopped selling chicken products from birds treated with antibiotics important to human health. Besides ending the use of antibiotics in the chickens used, Mc Donald’s also decided to remove high-fructose corn syrup from McDonald’s hamburger buns. It also laid out a 10-year plan to only use suppliers that keep chickens cage free.3 McDonald’s also offers dairy products from growth- hormone-free cattle. The company has also pledged to examine its product ingredients and review its food preparation procedures.

Technological

To attract millennial, Mc Donald’s has improved its social media presence, developed a smart phone app, and mobile payment systems. With its major move to propose all-day breakfast in all U.S. All kitchens are now equipped with separate grills for cooking eggs and burgers, rolling carts and utensils to use just with eggs (to prevent contamination), and new toasters so that they can prepare both buns and muffins at the same time (they toast at different temperatures). Advance technological adoption in supply chain management and franchise system makes it much ahead of its customers. McDonalds uses latest technologies for service and food delivery. Mc Donald’s continuous effort in technological upgradation in its supply chain and customer relationship management gives it an edge to achieve competitive advantage in market.

Environmental

Severe drought led to increase in price of beef which forced farmers to turn to more expensive forms of feed such as hay and corn, to ship cattle to greener pastures in the north, or to cull their herds through sales or sending heifers to the butcher instead of breeding them. The resulting price increases for supplies ranging from bread to eggs to meat are squeezing already tight operating margins.Mc Donald’s is maintaining its price by reducing its cost at other operational activities to gat a competitive advantage in the market.

Legal

To support healthier food choices, The Patient Protection and Affordable Care Act stipulated that calorie counts must be displayed on all food service menus of chains with at least 20 units and that restaurants must provide additional nutritional information upon request. These trends place considerable pressure on a fast food company that depends on hamburgers for the main portion of its income. McDonald’s reduced its Happy Meal calorie count by 20 percent by adding apples and halving the amount of french fries. McDonald’s has reduced the sodium content of its food by 15 percent, and plans to make further reductions in calories, sugars, saturated fats, and portion sizes by 2020. There are so many health related laws that can affect fast food businesses. McDonalds operates in more than 100 countries and has to remain cautious about compliance so as to not become a target of law.

References

  1. “Big Mac’s Makeover,” Economist.
  2. Joshua Brown, “McDonald’s Fixes its Marketing, Chipotle Fixes its Product,” Fortune, last modified January 21, 2015, http://fortune.com/2015/01/21/mcdonalds-chipotle-integrity-trust/.
  3. Mary Bowerman, “What’s America’s Favorite Fast-Food Restaurant?” USA Today, last modified July 1, 2015, https://www.usatoday.com/story/money/2015/07/01/ chick-fila–america-favorite-restaurant-mcdonalds-consumer-survey/29554303/
  4. Jargon, “McDonald’s to Pare Menu, Review Ingredients,” Wall Street Journal.
  5. Strom, “McDonald’s Seeks its Fast-Food Soul,” New York Times.
  6. Beth Kowitt, “Fallen Arches: Can McDonald’s Get its Mojo Back?” Fortune, last modified November 12, 2014, http://fortune.com/2014/11/12/can-mcdonalds-get-its-mojo-back/.
  7. Dean, Brat, and Gasparro, “McDonald’s CEO is Out As Sales Decline,” Wall Street Journal.
  8. Julie Jargon, “McDonald’s Tackles Repair of ‘Broken’ Service,” Wall Street Journal, last modified April 10, 2013, https://www.wsj.com/articles/SB10001424127887324010704578414901710175648.
  9. The VRIO framework   Jay B. Barney and William S. Hesterly  Source: Barney, J. B. and Hesterly, W.S.  (2010)  Strategic Management and  Competitive Advantage: Concepts and Cases,  third  edition, Pearson Education.
  10.  Stephanie Strom, “McDonald’s Seeks its Fast-Food Soul,” New York Times, March 7, 2015, https://www.nytimes. com/2015/03/08/business/mcdonalds-seeks-its-fast-food-soul.html?_r=0.
  11. When the Chips are Down,” Economist, last modified July 22, 2010, http://www.economist.com/ node/16646178
  12. Julie Jargon, “McDonald’s to Pare Menu, Review Ingredients,” Wall Street Journal, last modified December 10, 2014, https://www.wsj.com/articles/mcdonalds-planning-new-menu-with-fewer-items-1418230599.
  13. “McDonald’s Agrees Chinese Franchise Sale,” BBC News, last modified January 9, 2017, http://bbc.in/2frmkRk.
  14. McDonald’s, “Annual report, 2016, ” last modified March 1, 2017,http://bit.ly/2qXPprQ.
  15. Anon, (2015). PESTEL analysis of the macro-environment. [online] Available at: https://frrl.files.wordpress.com/2010/04/pestlanalysis.pdf [Accessed 2 Dec. 2015].
  16. Jargon, “McDonald’s Tackles Repair of ‘Broken’ Service,” Wall Street Journal

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