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McDonald’s: Polishing

the Golden Arches


Overview
In January 2003 McDonald’s, the world’s largest fast food chain, posted its first ever
quarterly loss of $343.8 million. The loss was attributed to increased competition, poor
management and marketing, and a failure to respond to changing customer needs and to
requests from franchisees to alter aspects of McDonald’s menu and operating practices. In
the midst of these challenges, CEO Jack Greenberg stepped down and James Cantalupo
came out of retirement in January 2003 to take the reigns of the foundering Fortune 500
company. Cantalupo wasted little time in admitting that the company was “in serious need
of improvement.” Cantalupo immediately announced an aggressive, broad-ranging
turnaround plan (called McDonald’s Plan to Win) designed to refocus McDonald’s on its
mission by increasing focus on internal operations, slowing store expansion (opening 640
fewer units than in 2002), enhancing the relevancy of McDonald’s to its customers, and
making the consumer the new boss at McDonald’s.
McDonald’s has come along way from its beginnings as a 1948 drive-in opened by Dick
and Maurice “Mac” McDonald in San Bernardino, California. The initial changes were
introduced by Ray Kroc, the pioneering entrepreneurial founder of McDonald’s who
conceived and implemented many of the strategic and operating elements that transformed
McDonald’s into one of the most successful franchising models in history.
By 2002 McDonald’s had a 33% share of U.S. fast food market with 13,491 units in the
United States (second behind Subway) and 16,534 outlets in 120 countries. However, sales
growth was slowing and franchisees were increasingly unhappy. The company’s problems
were due partly to mounting competition (including price wars and other market tactics)
initiated by fast-food rivals dissatisfied with their market share and partly to changes in
consumer eating preferences. One of McDonald’s strategic responses under CEO Jack
Greenberg was to acquire other Quick Service Restaurants (QSRs), including Boston
Market, Chipotle, Donato’s Pizzeria, Pret a Manger, and Fazoli’s. Greenberg also attempted
to fuel growth in McDonald’s core business by continued store expansion efforts,
refurbishing older stores, and introducing new methods to speed service delivery. However,
there was accumulating evidence that McDonald’s management was not attuned to fixing
the right things. For example, while the company still espoused Kroc’s values of Quality,
Service and Value, the company’s customer service rankings were the lowest among all of
their competitors and were lower even than the U.S. Internal Revenue Service. By January
2003, it was evident that Greenberg’s plan was not working; he resigned and Cantalupo
packaged a number of new initiatives into McDonald’s “Plan to Win” aimed at five key
drivers of success: people, products, place, price, and promotion. A year later, January 2004,
the company’s stock price had rebounded to $25, up from $12.50 in March 2003, and some
analysts were predicting a price of $34.00 by the end of 2004—a price still below the
$40.00 per share level the stock was bringing in the late 1990s and the early part of 2000.
This case reviews the history of McDonald’s and discusses the strategic changes that
occurred under the company’s various leaders, beginning with McDonald’s brothers to Ray
Kroc and through Cantalupo. The contribution of each key leader to the evolution of
McDonald’s strategy is identified as are the internal and external challenges that led to key
strategic changes.
The case continues with an analysis of the Quick Service or Fast Food industry in both the
national and international markets. Information is presented that reveals important trends
impacting the evolution of the Quick Service industry as well as the key strategies and
strategic intent of McDonald’s key competitors. The case concludes with a detailed
discussion of McDonald’s “Plan to Win” strategy.

Suggestions for Using the Case


The McDonald’s case should prove to be popular with students, given their firsthand
knowledge of the company and the fast-food industry. The comprehensive nature of the case
allows it to be used in either the strategy formulation or strategy execution section of your
class. However, we suggest that the case be assigned following your coverage of Chapters
3-6, as the material in these chapters provides a solid foundation for students to evaluate
McDonald’s current situation and critique its latest strategy. The McDonald’s case contains
plenty of information for students to conduct a thorough industry and competitive analysis,
understand how and why a company’s strategy evolves in response to environmental
changes, and evaluate the soundness of the company’s strategic responses over time. is
There is an accompanying video for this case that we recommend showing at the beginning
of the class period. It will help set the mood and tone for the discussion and debate that
follows.
The issues and topics in the case allow students to apply the information in Chapters, 3, 4
and 5 and can give them a chance to:
 Apply the concepts and tools of industry and competitive analysis.
 Conduct a first rate SWOT analysis.
 Develop a detailed financial analysis.
 Evaluate a company’s competitive strategy vis-à-vis major competitors.
Strategy implementation/execution issues in the case cut broadly across Chapters 11-13 and
allow students to:
 Examine the evolution of a company’s strategy and recognize the effect strategic
leadership can have on the development of a company’s strategy and its core
competencies.
 Understand how an industry leader can lose focus, have its position eroded by
competitors, and develop a strategic plan to regain its competitive position.
 Analyze a company’s turnaround plan including the extent to which the company has
developed appropriate goals and measurement criteria.
The McDonald’s case is a great vehicle for either written case assignments or team
presentations. A suggested assignment is as follows:
Having heard of your growing prowess in matters of strategic analysis, senior
executives at McDonald’s have retained your services to provide analysis and
advice to the company’s CEO and Board of Directors regarding circumstances in
the fast-food industry in 2004, McDonald’s situation, and its Plan to Win strategy.
You have been asked for a full analysis of the company and the industry and for
specific, actionable recommendations to improve the company’s strategy and help
sustain the company’s recent growth and business performance. Please support your
recommendations with the conceptual and analytical tools presented in Chapters 3
and 4. You are expected to provide McDonald’s with a report that is thorough and
thoughtfully prepared, that reflects strong grasp and application of the tools and
concepts of industry and competitive analysis and company situation analysis
(Chapters 3 and 4).
Given the high profile of McDonald’s and the evolving nature of the fast-food industry,
there is significant information available for further library/Internet research.

Assignment Questions
1. What are the chief economic and business characteristics of the fast-food industry?
2. What does your 5-forces analysis of the fast-food industry tell you about the
competition facing McDonald’s?
3. What forces are driving changes in the fast-food industry, both domestically and
globally?
4. What factors do you see as critical to competitive success in the fast-food industry?
5. Is the fast-food industry attractive? What factors make it attractive? Unattractive?
6. Describe how McDonald’s strategy has evolved under each of its CEOs. Did Ray Kroc
have the most influence of any CEO on McDonald’s strategy? Do you agree that
Greenberg should have resigned in response to McDonald’s loss in 2002? To what
extent do you believe McDonald’s current performance is attributable to actions taken
by Cantalupo versus those initiated by Greenberg?
7. What is McDonald’s current strategy? Which elements of McDonald’s current strategy
can be attributed to Kroc’s influence?
8. How well is McDonald’s current strategy working? Do you like the company’s
competitive position vis-à-vis other fast-food chains?
9. What are McDonald’s internal strengths and weaknesses? What are its external
opportunities and threats? Do a SWOT analysis in developing your answers.
10. What are the major strategic issues surrounding McDonald’s Plan to Win? What are the
specific areas McDonald’s is focusing on to revitalize the company? Is it using the best
metrics to measure their goal attainment?
11. Do you believe that the changes McDonald’s is making with its Plan to Win can
successfully reposition the company and provide the basis for a sustainable competitive
advantage?
12. What specific recommendations would you make to Cantalupo regarding the company’s
operations and how McDonald’s can maintain its leadership position?

Teaching Outline and Analysis


1. What are the chief economic and business
characteristics of the fast-food industry?
Students should be able to identify the following characteristics of the Quick Service
industry:
 Market Size and Growth Rates: 2003 sales for U.S. consumer food service
industry totaled approximately $408 billion. Future growth in the sandwich segment
is expected to be around 2% for the foreseeable future. The “other sandwich” is
growing at 12.8%. Globally, the food service industry is expected to grow by more
than $200 billion between 2002 and 2006.
 Scope of Rivalry: Competitive scope is mostly national, but major competitors
have expanded into international markets as the domestic market becomes rapidly
saturated.
 Stage of Industry Life Cycle: The domestic market is in a mature stage, while the
international market is in the rapid-growth stage.
 Number and Size of Competitors: The fast food industry is heavily fragmented,
but the ten largest competitors account for 14% of sales. The top 30 chains have U.S
system-wide sales of approximately $64 billion. Of this amount, McDonald’s
accounts for almost 33% of the sales, the top 5 chains account for 71.70% of sales,
and the top 10 chains 88.88%.
 Product Differentiation: No evidence of forward or backward integration. Rivals
are highly differentiated to accommodate the wide variety of consumer tastes and
preferences.
 Economies of Scale: Economies of scale are important because they allow
competitors to preserve margins in the presence of intense price competition.
 Customer Characteristics: The industry is broadening its customer focus to
include younger, hipper customers as well as more sophisticated customers.
 Entry Barriers: As fast food restaurants are usually franchises, capital
requirements are dictated by the franchisor. Typically, a minimum initial payment
of $175,000 plus a monthly service fee as a percentage of total monthly sales is
made to the franchisor. However, it would be very difficult to enter the market and
compete against the national chains given the significant capital requirements it
would require and the entrenched position of these chains.
 Industry Profitability: Industry profitability is decreasing as the domestic market
matures, and international profitability is surpassing the domestic market for the
first time.

2. What does your 5-forces analysis of the fast-food


industry tell you about the competition facing
McDonald’s?
Below is a graphic portrayal of the five-forces model for the fast food industry:
Five Forces Model of Competition: in the discussion below, a (+) indicates a factor
acting to intensify competitive pressures and a (–) indicates a factor acting to
weaken competitive pressures.
Rivalry Among Competing Sellers: Very Strong
Competitive rivalry is the strongest of the five forces. The weapons of rivalry are price,
quality, convenience, location, promotion and brand name recognition. Specific factors
underlying the nature and strength rivalry include:
 Large number of competitors, with the industry leaders becoming more equal in size
and capability. (+)
 Domestic demand is growing slowly(+); although international demand is growing
more rapidly, many companies are chasing this growth (+).
 Competitors often rely on price cuts to boost volume. (+)
 Low switching costs for consumers. (+)
 Moderate level of differentiation (–)
 Key competitors are dissatisfied with their market share (+)
Threat of Entry: Relatively Weak
Students should be able to differentiate between entry on a local level and entry as a
significant competitor against the largest fast food chains. You can acknowledge that it
is relatively easy for a firm to enter the local market. However, local fast-food
enterprises are not really important competitors to firms such as McDonald’s and
students should be encouraged to focus on entry at the chain level. At this level,
students should spot the following factors affecting the threat of large-scale entry into
the fast-food market:
 Economies of scale allow preservation of margins during price cuts (-)
 Relatively unattractive market with slowing growth (-)
 Competitors are working to build brand loyalty through new menus, increased
efficiency, and improved service. (-)
 Existing competitors have accumulated expertise in marketing and efficiency (-)
 Inability of most new firms to match technology and know-how of firms already in
the industry (-)
 Many potential customers with varied tastes and preferences (+)
 High capital requirements to start a nationally competitive chain restaurant from
scratch (-)
 Rapid demand growth in some international markets (+)
 Uncertain economic outlook of some international markets (-)
 Threat of restrictive regulatory policies stemming from mad-cow disease (-)
Competition from Substitutes: Very Strong
This section offers an opportunity to discuss the nature of substitutes based on the need
being filled. If students identify the need being filled as simply eating, then they can
make a case that the competitive force of substitutes is very strong.
 Alternatives to fast food are readily available. Customers can choose other types of
restaurants, including buffets, or choose to cook at home (+)
 Alternatives are attractively priced (+)
 Buyers view the substitutes as satisfactory in terms of quality (+)
 Buyers have little or no switching costs in going to substitutes (+)
However, it is unlikely that companies in the fast-food industry would view any type of
food as their competitors. It is more likely they would perceive the need being filled as
convenience, quality, and value. Based on this, competition from substitutes is
moderate.
 Alternatives to fast food are readily available. Customers can choose other types of
restaurants, including buffets, or choose to cook at home (+)
 Many alternatives would be less attractively priced, but perhaps more satisfying and
nutritious (+)
 Buyers are likely to view higher-priced substitutes as unsatisfactory (-)
 Buyers have no switching costs when changing substitutes, other than a higher price
(+)
Bargaining Power of Suppliers: Weak
 No evidence of supplier-seller collaboration in the fast-food industry (-)
 Fast food supplies are mostly commodities (-)
 Industry leaders are major customers to suppliers (-)
 While McDonald’s does own some farms, overall there is relatively little threat of
backward vertical integration (+)
 The quality of some of the products supplied (e.g., meat) can significantly impact
the quality of the products produced by the fast-food companies.
Bargaining Power of Buyers: Moderate to weak
Students should recognize that there are two types of buyers in this situation: customers
who purchase fast-food and franchisees.
General customers have some power because:
 Buyer’s switching costs are relatively low (+)
 Customers purchase in small volumes. (-)
 Consumers are well-informed about sellers’ products, prices, and costs (+)
 Customers can always choose to eat at home (+)
 Customers have discretion whether or not to purchase fast food products (+)
However, this power is largely mitigated, resulting in low overall power, because
 Customers purchase in small volumes (-)
 Large number of customers willing to purchase fast food products (-)
Franchisees have more power because:
 Franchisees are an important element No evidence of a national chain’s service and
can significantly impact the quality of the chain’s offerings (+)
 Franchisees also well-informed about the chain’s offerings (+)
However:
 Franchisees can’t really integrate backwards (-)
 Due to seller-buyer collaboration and franchise lock-in, switching costs are high. (–)
Overall franchisee power is moderate.
Conclusion concerning the overall strength of competitive pressures
The competitive environment for fast-food is not particularly attractive overall. The
market is crowded with rivals and outlets and growth is slow. Many consumers are
looking for healthier alternatives to fast-food. The long run profitability of the fast-food
business is moderate and declining. While there is likely to be sustained profitability
because of the weak power of consumers, weak power of suppliers and weak threat of
entry, overall industry profitability will be kept in check due to strong rivalry and
mounting competition from substitutes.
The five forces model shows that rivalry among competing sellers is very strong, the
threat of potential entry is relatively weak, the threat of substitutes is very strong,
suppliers have little bargaining power, and buyers have strong bargaining power. These
factors combine to make the QSV food industry extremely competitive. A new entrant
faces several firmly entrenched competitors with access to economies of scale, the
ability to wage sever price wars, and strong brand image/customer loyalty.
3. What forces are driving changes in the fast-food
industry, both domestically and globally?
The following underlying causes of change in the quick service food industry can be
identified:
 Changes in long-term industry growth rate: Domestic growth in fast food industry is
slowing, leading to increased rivalry.
 Globalization: Saturation in the domestic market has led to an increase in
globalization as large chains look for growth opportunities in foreign markets.
 Changes in societal concerns, attitudes, and lifestyles:
 Customers are increasingly focused on value
 Customers are increasingly focused on quality and menu selection
 Increasing number of health-conscious consumers who shy away from fast-food
because of the menu options
 Increasing number of meals being eaten away from home—hence a bigger
potential market
 Increasing product innovation
 Differentiation to suit increasingly varied consumer tastes and preferences
 Broadening customer focus to attract younger, more sophisticated customers
 Increased offering of premium products both domestically and overseas
 Changes in who buys the product
 Broadening customer focus to attract younger, more sophisticated customers
The overall impact of the driving forces is mixed—partly positive and partly negative in
terms of the effects on industry attractiveness and long-term profitability.
Steadily increasing international demand will affect long-term growth rate.

4. What factors do you see as critical to competitive


success in the fast-food industry?
Students should be able to identify a number of key success factors based on their own
knowledge of the fast-food industry, from experience with the industry, or from
information from the case. While students will be able to produce a long list of factors
important to competitive success, they should be pushed to narrow it down to 4-6 key
factors.
 Prime locations – Consumers often choose a restaurant based on the convenience
of the location.
 Product innovation and improved menu items – Innovative ideas and concepts
and keeping the menu relevant are important given rapidly evolving customer tastes
and preferences.
 Brand reputation – Brand recognition is key because a favorable image is
positively correlated with the probability that a consumer will frequent an
establishment. A company with a reputable and favorable image will have an
advantage over rivals.
 Quality – Food quality is key for obvious reasons but also because it impacts other
KSF’s, including brand reputation and customer satisfaction.
 Marketing & Customer Service – The main source of consumer satisfaction is the
level of over-the-counter service, such as speed of order fulfillment and order
accuracy.
 Value – Value is a function of quality and price. Fast-food customers are especially
value-conscious but are willing to pay higher prices for larger portions and higher
quality food, as is evidenced by the recent success of Arby’s and Hardee’s.

5. Is the fast-food industry attractive? What factors make it


attractive? Unattractive?
Factors Making the Industry Attractive:
 A relatively low threat of entry
 McDonald’s is still the industry leader
 Little uncertainty in the long term stability of the QSR food industry
 Large international growth potential
 Increase in meals eaten out of the home
Factors Making the Industry Unattractive:
 Strong competition prevents excessive profitability
 Competitive forces increasing
 Mature domestic market
 Weaker rivals gaining strength behind changing consumer preferences
 Growing trend of customized sandwiches and a more upscale dining experience
 Price competition
Special Industry Issues/Problems
 Consumer preferences shifting to include healthier fast food choices
 Large potential for international growth could lead to foreign competition entering
industry
Profit Outlook:
 Competitors McDonald’s can increase profits by differentiating to meet healthier
buyer preferences with quality products, while maintaining low prices
 Since domestic demand is mature, large sales increases could be realized with
international expansion into newly-industrialized markets.
6. Describe how McDonald’s strategy has evolved under
each of its CEOs. Did Ray Kroc have the most influence
of any CEO on McDonald’s strategy? Do you agree that
Greenberg should have resigned in response to
McDonald’s loss in 2002? To what extent do you believe
McDonald’s current performance is attributable to
actions taken by Cantalupo versus those initiated by
Greenberg?
This question provides students with an excellent opportunity to understand how a
company’s top management impacts the evolution of the company’s strategy. Each top
manager has left a clear imprint on the company, most of which are still visible in
McDonald’s current strategy. It is important to trace this influence from the McDonald
brothers through Cantalupo, as many of them will not have realized prior to the case that
there actually was a McDonald behind the company.
McDonald brothers:
 Created “Speedy Service System” featuring self-service restaurant with a limited
menu, a kitchen that utilized an assembly-line layout, and a $.15 hamburger that
allowed families to eat out more often
 Focus on franchising, although unsuccessful themselves in implementing this
 Focus on uniformity of operations and cleanliness
Sonneborn & Kroc:
 Formed McDonald’s corporation
 Implemented real estate holding segment of business model
 Took McDonald’s public
 Greatly expanded franchising efforts
 It is interesting to note that Kroc and Sonneborn had a falling out and Sonneborn
dos not appear in any of the official McDonald’s history posted on their website.
This is especially interesting given the importance of McDonald’s real estate
element to the company’s business model.
Fred Turner & Kroc:
 First international expansion
 1,000th restaurant opened
 System-wide introduction of Big Mac
 McDonald’s began to serve breakfast
 First McDonald’s Playland
 Turner was Kroc’s first protégé and was termed his “grill man extraordinaire.” A
close personal relationship developed between these two men that positively
influenced their ability to work as a team.
Michael Quinlan:
 Quinlan was one of the first CEO’s to face the problems that led to McDonald’s
decline.
 Faced with changing customer preferences due to technological changes and health
consciousness
 Declining customer base
 Increased competition from other quick service restaurants as well as non-
traditional outlets like grocery stores and convenience stores
 Several menu items were introduced as an attempt to cope with changes, but most
ultimately failed
 Increased expansion and partnerships to deal with increased competition
 Increased expansion caused cannibalization and tension between McDonald’s and
franchisees
 QSVC store evaluation system discontinued to attempt to ease tensions
 Increased focus on international expansion, with focus on more local flavor in many
international locations
 First ever quarterly decline in earnings in 1987
Jack Greenberg:
 Implemented a plan to continue expansion and diversification away from the
hamburger segment by acquiring other Quick Service Restaurants in the face of an
intense price war, rapid product innovation, falling customer service rankings, and
inconsistent quality
 Introduced 40 new menu items to combat rivals’ innovation, all of which failed
 “Made for You” cooking system implemented and failed
 Instituted QSC comprehensive store evaluation system
 Streamlined operations, reducing number of regions and laying off employees and
closing underperforming overseas outlets
 Initiative to refurbish old stores
 Posted first quarterly loss since 1965
 Greenberg was criticized for taking the company too far from its core business and
for starting too many initiatives without focusing on their implementation.
Jim Cantalupo:
 May use IPO’s in other countries to raise revenue
 Tentatively offering retail merchandise for sale in certain stores
 Installing computers in restaurants in partnership with Freddie Mac
 Implementation of Plan to Win
 Divesture of partner brand activities to focus on core business units
Did Ray Kroc have the most influence of any CEO on McDonald’s strategy?
As the founder of the modern McDonald’s corporation, Ray Kroc undoubtedly had the
most influence on McDonald’s. Under Kroc’s guidance McDonald’s went from a small,
local company to an international corporation. He fine-tuned the business model and
was responsible for the company’s focus on domestic and international expansion.
However the key elements of Quality, Service and Cleanliness are still at the core of
McDonald’s values.
It may be interesting at this point to ask students if they see any potential negatives to
Kroc’s strong influence on the company. It could be argued that Kroc’s influence was
so strong that it created corporate inertia and hubris that prohibited the company
recognizing significant challenges earlier. Students may also recognize that Kroc may
have been difficult to work with given his falling out with Sonneborn and his attack on
the McDonald’s brothers in San Bernardino “out of spite.” These characteristics may
have created a culture in which lower level managers may not have felt comfortable in
questioning upper level management.
Do you agree that Greenberg should have resigned in response to McDonald’s loss
in 2002?
This is an interesting question and you should have split opinions. It may be useful to
have students vote on this question and then ask students to support their position.
Those who believe Greenberg should have resigned are likely to site his strategy
implementation failures and his initiatives that took the company from its core business.
They will note that the increased competition and product innovation were a product of
the maturation of the quick service restaurant industry, and he led McDonald’s away
from the core business segment and into new market niches instead of focusing efforts
on first improving the things that were wrong in the company, such as lagging customer
service, poor quality, and dated store décor. By introducing the greatly expanded menu,
McDonald’s was attempting to cater to a wider variety of consumer tastes and
preferences, but the system-wide introduction of 40 new products virtually ensures that
none of them will be of high enough quality to succeed.
Those who believe Greenberg should not have resigned are likely to recognize that a
number of Cantalupo’s efforts have their beginnings in Greenberg’s leadership. These
include the focusing more on the customer through the introduction of new menu items,
refurbishing older restaurants, and operational changes including streamlining
operations and regional restructuring.
To what extent do you believe McDonald’s current performance is attributable to
actions taken by Cantalupo versus those initiated by Greenberg?
A large portion of McDonald’s success is due to Cantalupo, while some success is due
to Greenberg’s efforts before his resignation. Greenberg’s streamlined operations,
regional restructuring, and international downsizing have made it easier for Cantalupo
to implement his changes more efficiently. However, Cantalupo’s Plan to Win and his
ability to successfully implement key elements of his plan are largely responsible for the
company’s renewed vitality. It should be stressed to the students that this is one of the
key differences between Greenberg and Cantalupo. While Greenberg was strong in
strategy formulation, Cantalupo was much stronger in strategy implementation.

7. What is McDonald’s current strategy? Which of the five


generic competitive strategies is McDonald’s using?
Which elements of McDonald’s current strategy can be
attributed to Kroc’s influence?
Some students are likely to see McDonald’s strategy as one of low-cost leadership;
others are likely to argue that it is one of being a best-cost provider. In the late 1990’s
and early 2000 with the price wars the industry was experiencing, most of the major
rivals were striving for low costs so as to keep their prices attractively low. There still
are some elements of low-cost leadership in McDonald’s strategy (e.g., the value meal).
However, with the revitalization plan McDonald’s seems to be moving a fraction more
upscale (which some students might interpret as a shift toward a best-cost provider
strategy because of the emphasis on giving customers more for their money). It is worth
the time at this juncture to clearly delineate between these strategies, reminding students
that the low-cost leadership strategy requires the company to strive to become the
overall low-cost provider of the product. A solid case can be made that McDonald’s is
now and is likely to remain a very, very economical place to eat a meal (even though it
is going upscale somewhat). Whose fast-food meals are lower-priced than McDonald’s?
Who in the fast-food industry has more scale economies and lower costs than
McDonald’s? Yes, a best-cost strategy is designed to give customers more value for
their money by combining an emphasis on low cost with more than minimally
acceptable quality, service, features and performance. But is McDonald’s repositioning
itself to be more of an upscale place to eat? Is it going to be meaningfully underpriced
by rivals? The evidence that McDonald’s is shifting to upscale attributes and
abandoning a low-cost strategy is pretty questionable. But some students (and
instructors) may see the moves to upscale differentiation with other fast-fast chains as
where McDonald’s is headed, thus justifying their claim that McDonald’s is migrating
from low-cost leadership (where it has been for decades) to using a best-cost provider
strategy. So perhaps there’s room for disagreement here. But unless McDonald’s moves
away from its low-price approach and begins to price above rival fast-food chains (to
cover the added costs of upscale attributes), we think the case for designating
McDonald’s as having a best-cost provider strategy is pretty thin. We think there is
plenty of room for McDonald’s to remain the industry’s low-cost leader and still
improve its service, quality, cleanliness, and menu offerings because of the volume of
business it does allows it to spread such costs out over more units. There’s scant
evidence of backing off the longstanding efforts at McDonald’s to control costs.
McDonald’s competitive strategy refocuses the company on its mission by doing
the following:
 Increasing focus on internal operations to help increase quality and control costs
 Slowing store expansion to promote quality (640 fewer units than in 2002)
 Enhance the relevancy of McDonald’s to customers
 Make customers the new boss at McDonald’s
Elements attributable to Kroc:
 Focus on internal operations (uniformity and cleanliness)
 Customer-focused ideas
 Quality, Service, Value

8. How well is McDonald’s current strategy working? Do


you like the company’s competitive position vis-à-vis
other fast-food chains?
Cantalupo’s strategy does seem to be having positive effects on McDonald’s. The
company has experienced significant growth (double-digit growth rate in parts of 2003)
and stock price has increased substantially (from $12.50 to $25.28). While it is not
stated in the case it is also reasonable to assume that the company has improved its
service rankings from the abysmal rankings in 2002. The financial ratios also show
improvement in 2003.

The financial analysis indicates that McDonald’s position steadily deteriorated during
the 1999-2002 period but that recent efforts have improved the company’s financial
position (the first three quarters of 2003).
 ROA fell from 9.3% in 1999 to 3.7% in 2002, but has recovered nicely in 2003.
 ROE rose from 1998 to 2000 but fell from a high of 21.5% in 2000 to 8.7% in 2002;
it has bounced upward during 2003 to a respectable 18.8% in Q3 of 2003.
 The current ratio is relatively low but improved somewhat between 2000 and 2002,
well below the 2.0 level that is traditionally acceptable.
 Both the debt to assets and debt to equity ratios increased from 1998 to 2002 further
demonstrating McDonald’s weakening position.
 Net revenue growth fell off substantially from 1999 through 2002, but has shown
some improvement in 2003; the same can be said for operating margins as a
percentage of revenues.
 Operating expenses as a percentage of revenues increased from 1998-2002, but
have dropped significantly in 2003 (numbers that support McDonald’s continuing
emphasis on cost control and low-cost leadership). Students should recognize that
some of the increased expenses in 1999-2002 were due to Greenberg’s initiatives,
while the declines reflect Cantalupo’s turnaround effort.
Competitive Position vis-à-vis Other Fast-Food Chains
 McDonald’s is still the largest competitor with 7 times the revenue of the closest
competitor (Burger King)
 McDonald’s is growing more slowly than many rivals
 Largest international operations
 Many competitors have differentiated to successfully fill market niches left unfilled
by McDonald’s, establishing themselves as leaders in their specialties
Figure 1 of this teaching note illustrates the market position of the main players in the
quick service sandwich chain industry. This strategic group map reveals that
McDonald’s closest competitors are Burger King and Wendy’s in terms of the breadth
of product line and Pizza Hut and KFC in terms of global coverage. However, no single
competitor has developed the product line and international coverage of McDonald’s. It
is interesting to ask students to predict future moves of rivals and how their positions
may change on this map. This should reveal that several competitors are trying to take
aim at McDonald’s but that McDonald’s should maintain its position given the Plan to
Win.
Exhibit 1 Financial Analysis

Selected McDonald’s Financial Ratios


1998 1999 2000 2001
2002 Q1 2003 Q2 2003 Q3
2003
ROA 7.8% 9.3% 9.1% 7.3%
3.7% 5.2%* 7.6%*
8.8%*
ROE 16.4% 20.2% 21.5%
17.3% 8.7% 12.0%*
16.0%* 18.8%*
Current Ratio 0.52 0.48 0.70 0.81
0.71 0.79 0.78 0.74

Debt/Assets 0.52 0.54 0.58 0.58


0.57 0.56 0.54 0.54

Debt/Equity 1.09 1.18 1.36 1.37


1.33 1.26 1.15 1.17

Net Revenue Growth N/A 6.75% 7.42%


4.40% 3.60% N/A
12.66% 5.23%
Operating Margin $2,761.9 $3,319.6 $3,330.0
$2,697.0 $2,113.0 $674.6
$826.2 $963.9
Operating Margin as a
% of Revenue 22.24% 25.04% 23.38%
18.14% 13.72% 17.75%
19.30% 21.40%
Operating Expenses
as % of Revenue 77.76% 74.96% 76.62%
81.86% 86.28% 82.25%
80.70% 78.60%
Sales & Marketing expenses
as % of Revenue 11.74% 11.14% 11.14%
11.18% 11.12% 10.43%
10.90% 10.13%
System-wide Sales $12,421.4 $13,259.3 $14,243.0
$14,870.0 $15,406.0 $3,799.7
$4,280.8 $4,504.6
Sales at Company-
Owned Stores $8,894.9 $9,512.5 $10,467.0
$11,041.0 $11,500.0 $2,856.1
$3,189.7 $3,351.2
% of Total Sales 71.61% 71.74% 73.49%
74.25% 74.65% 75.17%
74.51% 74.40%
Sales at
Franchised Stores $3,526.5 $3,746.8 $3,776.0
$3,829.0 $3,906.0 $943.6
$1,091.1 $1,153.4
% of Total Sales 28.39% 28.26% 26.51%
25.75% 25.35% 24.83%
25.49% 25.60%

*Annualized.
Figure 1 Representative Strategic Group Map, for Quick
Serve
Sandwich Chains

9. What are McDonald’s resource strengths and weaknesses?


What are its external opportunities and threats? Do a
SWOT analysis in developing your answers.
Resource Strengths and Competitive Assets
 Strong financial position as the industry leader
 Widely recognized market leader with large customer base
 Proven production methods
 Excellent supply chain management skills
 Strong global distribution capability
 Strong alliances with other companies
 Strong brand name awareness
 Access to economies of scale
 Seasoned management
 Great bargaining power due to large size of the company
 Extensive real estate holdings
Resource Weaknesses and Competitive Liabilities
 Lagging in product quality/customer service
 Lack of product offerings to meet varied customer tastes and preferences
 High employee turnover
 Many restaurants are outdated
 New restaurants cannibalizing sales in established locations
External Market Opportunities
 Increasing international demand provides opportunities for increased international
expansion
 Expansion of menu to meet healthier consumer preferences
 Falling global trade barriers in attractive markets
 Increase in out of home consumption due to increasing disposable income, decrease in
free time, increasing in working mothers
 Advances in production technology
 The strength of the dollar has help international profits when translated into U.S. dollars
External Threats Affecting McDonald’s Well-Being
 Loss of sales from substitutes like eating at home and casual dining
 Rivals copy McDonald’s innovations fairly quickly, eliminating first-mover advantages
 McDonald’s is unable to sustain recovery and rivals use competitive weapons to further
erode at market share
 Unstable international economic conditions could slow entry into some markets
 McDonald’s fails to meet healthier menu preferences of consumers, forcing them to go
to competitors
 Increasing competition among rivals continues to squeeze profits
 Possible litigations and lawsuits
 Younger generations may have little connection with the All American image of
McDonald’s
 Increasing demand for fast casual options
Conclusions Concerning McDonald’s Competitive Position
McDonald’s is the dominant domestic and global leader in the QSR food industry. It has a
knowledgeable management team that is pursuing some fresh strategic initiatives to restore
some of the company’s market vitality, luster, and consumer appeal. It has outstanding
brand awareness, access to large economies of scale, a proven production system, and a
large customer base. However, McDonald’s has been weakened by low customer
service/product quality scores. It is also behind the curve in implementing healthier menu
offerings to meet changing consumer tastes and preferences. If the company can address
these issues, it ought to be able to defend its position as the market leader in the QSR food
industry. McDonald’s executives must be aware that any first-mover advantages are quickly
copied, global economic conditions are often unstable, and failing to meet healthier
consumer preferences could further erode the company’s leadership position.

10. What are the major strategic issues surrounding


McDonald’s Plan to Win? What are the specific areas
McDonald’s is focusing on to revitalize the company? Is the
company using the best metrics to measure its goal
attainment?
Key Challenges
 Increasing financial profitability in the presence of a nearly saturated domestic market
 Rebuilding the company’s reputation for fast, friendly service and cleanliness
 Sustaining the turnaround begun by Cantalupo
 Implementing the Plan to Win
 Maintaining product and marketing innovation to protect the core market from rivals
and from substitutes
Recognizing many of these challenges, McDonald’s crafted the Plan to Win, which focuses
on five key success drivers:
 People
 Products
 Place
 Price
 Promotion
Specific areas of focus:
 Customer Service—Simplifying restaurants, reducing the menu, employee hospitality
training, e-learning program to train staff worldwide, and reinstitution of hostesses in
Latin America. Measured by reduction of complaints and increased friendliness and
speed-of-service scores.
 Product Quality—Premium products, wholesome foods, healthier side-items, Premium
Salads, and the Salads Plus Menu in Australia. Measured by improvements in hot and
fresh food scores.
 Restaurant Modernization—Installation of wireless hot-spots, McCafe openings, and
restaurant renovations. Measured by return of cleanliness scores to all-time highs.
 Productivity/Value—Product offerings at different price points to appeal to price-
sensitive customers and those willing to pay more. Measured by improvements in value
for money scores and restaurant margins.
 Brand Loyalty—“I’m lovin’ it” campaign, premium salads and better Happy Meals,
Ronald McDonald’s return to prominence, relevant advertising targeted at young adults,
and renewed leadership in social responsibility. Measured by brand awareness increases
and restoration of Happy Meal sales per unit to all-time highs.
Is McDonald’s using the best metrics to measure its performance?
In the “Plan to Win” McDonald’s clearly defines performance metrics that they intend to
use to measure the attainment of their goals. It is a useful exercise to ask students whether
they believe the metrics chosen are adequate given McDonald’s goals. In some of the cases
the answer is clearly yes, while in others there seems to be a significant disconnect between
the metrics and the goals they are supposed to measure.
 Customer Service—The measure of a reduction in complaints related to service and
increases in friendliness scores and speed-of-service seems appropriate.
 Product Quality—The measure of choice is an improvement in their hot and fresh food
scores. This seems appropriate but might benefit from a metric that allows
benchmarking against competition with similar offerings.
 Place—McDonald’s intends to become a customer destination by making its restaurants
cleaner, more relevant and more modern. Consistent with this goal the company intends
to “make McDonald’s a place customers seek out because it serves the food they want
in a contemporary, welcoming environment they want to be in – whether dining alone,
with friends or with family.” The primary measure McDonald’s will employ to
determine the success in pursuing this driver is restaurants’ cleanliness scores with a
goal of returning to their all-time highs. This measure seems inadequate given the
breadth of the company’s goals with regard to place as it does not cover the goals of
becoming more relevant and more modern.
 Productivity/Value—Improving productivity and value. In offering value, McDonald’s
concentrates on offering a broad variety of products at a range of price points that will
appeal to price sensitive customers, such as McDonald’s dollar menu in the U.S., as
well as those willing to pay for premium products. McDonald’s will measure these
goals using improvement in value for money scores and restaurant margins. Both of
these metrics seem adequate.
 Brand Loyalty—The final driver of exceptional customer experiences is building trust
and brand loyalty through promotion, including marketing, promotion and trust.
Specific metrics in this area include increasing brand awareness and increasing the
number of Happy Meals sold per unit to the previous all-time high. It is unclear how the
number of Happy Meals sold related to the brand loyalty and trust goals or how they
plan to operationalize their brand awareness measure.
After reviewing the appropriateness of the metrics, it is useful to ask students why such
imperfect measures are being used in some cases. It seems the answer involves issues of
cost of measurement, the company’s ability to change operations that allow them to impact
specific metrics and the ability to measure the metrics.

11. Do you believe that the changes McDonald’s is making


with its Plan to Win can successfully reposition the
company and provide the basis for a sustainable
competitive advantage?
This question provides an excellent opportunity to reinforce the four characteristics of a
sustainable competitive advantage: valuable, rare, not easily imitated, and hard to trump
with other resources. The Plan to Win does build valuable competencies that are difficult to
imitate due to path dependencies. However, it is not clear whether the capabilities are rare,
given the abilities of the other competitors. Further, it is unclear whether the resources can
or cannot be overmatched by the resources possessed by rivals. Therefore, although
McDonald’s is still the industry leader and it can capitalize on their strong brand awareness
and distribution/production capability to implement changes successfully, their competitive
advantage is temporary at best. Had it continued their original momentum, path dependency
might have assured the company a sustainable competitive advantage. However, its miscues
over the last two decades have reestablished parity in the industry. Thus, McDonald’s
cannot afford to rest on its prior accomplishments and industry-leading position or there is a
potential that competitors could steadily draw customers away with more appealing product
offering and close the market share gap.

12. What specific recommendations would you make to


Cantalupo regarding the company’s operations and how
McDonald’s can maintain its leadership position?
Undoubtedly, the Plan to Win provides an outstanding point of departure for a turnaround in
performance at McDonald’s. Specific initiatives that can further McDonald’s recovery
include:
 Continue to maintain the external focus detailed in the Plan to Win. This focus would
include:
 Leverage brand awareness and advertising to ensure that customers respond.
 Offer healthier menu selections for adults and children, possibly choosing a popular
diet program and creating selected items to cater to consumers on the program.
Advertise healthy offerings for children. If the kids want to come, the parents will
follow.
 Proactively alter the menu to act as a leader in the fast-food industry and to establish
their reputation as a customer responsive company.
 However, when offering new products, don’t overextend the company. Offer new
products only when quality is assured. Also, make the number of new offerings
reasonable so the customer isn’t overwhelmed.
 In facing competitors, McDonald’s needs to
 Ensure they do not underestimate new entrants. In improving their internal
operations McDonald’s needs to scan the environment for industry trends and new
competitors that reveal changing customer preferences.
 Benchmark against leaders in niches you’d like to enter. In benchmarking they can
find new products and services that can be adopted in McDonald’s business model.
 Be wary of adopting an imitative strategy that would brand the company as a “me
too” player.
 Internally, McDonald’s needs to continue focusing on its core business, and
streamlining internal processes to ensure focus is on uniform, clean, quality, service-
oriented restaurants. These operations are the core of the business and, as evidenced by
the 2002 operating results, failure to pay attention to the internal operations can have a
deleterious effect on financial results.
 McDonald’s franchise owners are a powerful force in the company. To leverage this
force, McDonald’s needs to ensure their “buy-in” to the Plan to Win and to the
evaluation system. One way to do this would be to work with franchise owners as the
evaluation system evolves and allow them to have input into any changes made to the
system. When implementing this system, McDonald’s has to make it a tool for
improvement that is valued by the franchisees rather than a punitive tool to ensure
compliance. This will increase franchisee ownership of the system. However,
McDonald’s must be willing to take corrective action against franchisees that
consistently under-perform in the evaluation system. If necessary, McDonald’s must be
willing to terminate the franchise relationship with chronically underperforming units.
 Internationally, McDonald’s should continue expanding to meet international demand,
but do so at a pace that ensures adequate training and preparation. In expanding
internationally, McDonald’s should look for learning opportunities that can be
transferred throughout the entire organization. McDonald’s should also continue to
balance the cost related needs for globalization with the local demands for
customization. Successful new products should be evaluated for system wide adoption.
 Finally, in implementing the turnaround, perhaps the greatest danger is that McDonald’s
will become too internally focused. The potential of this possibility is evident in some
of the performance metrics introduced in the Plan to Win. To avoid this myopia,
McDonalds should develop a formal mechanism for environmental scanning and a way
to introduce important findings into McDonald’s strategy.

Epilogue
In April 2004 McDonald’s CEO Jim Cantalupo died suddenly of a heart attack while attending a
large convention of owners and operators of McDonald’s restaurants in Orlando. Less than 6
hours after his death, McDonald’s board of directors at a hastily arranged meeting, named 43-
year-old Charlie Bell, McDonald’s president and chief operating officer, to replace Cantalupo.
Cantalupo had been scheduled to address the convention at 9:30 a.m., but Bell’s quick
appointment allowed him to make the opening remarks on schedule as the new CEO. During his
16 months as CEO, Cantalupo had executed the most dramatic turnaround in McDonald’s
history. His accomplishments were seen as quite important:
 Killing a $1 billion technology program to link all McDonald’s outlets worldwide to
McDonald’s HQ
 Slowing “runaway” store expansion
 Introducing premium entrée salads
 Improving the taste of burgers with new seasonings
 Speeding drive-thru service
 Seeing that surly store employees were disciplined
 Helping blunt attacks that McDonald’s was a purveyor of unhealthy, fat-heavy foods,
partly by killing “super size” French fries and soft drinks and partly with some new
advertising campaigns emphasizing fitness.
During Cantalupo’s tenure, McDonald’s reported 11 consecutive months of same-store sales
increases.
Bell was already in line to replace Cantalupo, who came out of retirement to lead the turnaround
effort at McDonald’s. He was expected to continue Cantalupo’s efforts and had enjoyed
considerable success in his previous jobs at McDonald’s.
In May 2004, McDonald’s announced that Charlie Bell was undergoing treatment for cancer. He
was expected to recover and to continue in his role as CEO.
For further updates, please check our periodically updated case epilogues at the password-
protected Instructor Center (www.mhhe.com/thompson) for the latest information. The online
epilogues are updated whenever we become aware of pertinent breaking news about the
company and/or developments relating to the specific issues contained in the case.