TEACHING NOTE McDonald’s Corporation Structure of the Case The case is written f
ID: 361184 • Letter: T
Question
TEACHING NOTE
McDonald’s Corporation
Structure of the Case
The case is written from the perspective of McDonald’s CEO Steve Easterbrook. Dated approxi-mately six months after Easterbrook assumed office in March 2015, it highlights the company’s recent and dramatic decline in performance amidst increasing competition.
McDonald’s was started by the McDonald brothers in 1940 in San Bernardino, California. By limit-ing the menu to burgers, fries, and drinks, Dibck and Mac McDonald were able to emphasize quality and streamline operations, leading to rapid growth. In partnership with Ray Kroc, they founded the McDonald’s Corporation in 1955 with the vision of establishing McDonald’s franchises throughout the United States. Kroc bought out the brothers’ shares in 1961 and oversaw a period of rapid expan-sion throughout the 1960s and 1970s. The company had its first public offering in 1965, debuting at $22.50 per share. It opened its first international location (Canada) in 1967. Around the same time, Kroc started to diversify McDonald’s menu. New menu items (Egg McMuffin, Chicken McNuggets, etc.), operational efficiency, and technological advances were the company’s main weapons throughout the burger wars of the 1980s. Ray Kroc passed away in 1984, leaving behind a sprawling empire of more than 7,500 restaurants worldwide.
By the 1990s, McDonald’s rapid pace of domestic expansion began to slow. The company had varying success with further efforts to adapt its menu internationally and domestically. When Jack Greenberg became CEO in 1998, he quickly took corrective action, announcing a geographic reorgani-zation, a new food preparation system, and a series of job cuts, all while scrapping plans for numerous store openings. Instead, he diversified the company’s portfolio by buying different restaurant chains (e.g., Chipotle). These purchases were later divested when McDonald’s strategy shifted yet again in the early 2000s.
The company went through three CEOs between 2003 and 2004, at which time Jim Skinner assumed the top post and started to implement his “Plan to Win,” refocusing the company on execution and innovation. Under the umbrella of the “i’m lovin’ it” advertising campaign, the restaurant featured healthier and higher-quality foods such as white-meat chicken and salads. The restaurants themselves were redesigned to promote a more modern experience for the consumer. Don Thompson served as COO under Skinner, leading the successful McCafé campaign and cementing his path as Skinner’s eventual successor. Unfortunately, McDonald’s struggled with weakening sales under Thompson’s reign despite his efforts to optimize the menu, improve the customer experience, and make McDonald’s
more accessible to a broader market base. Steve Easterbrook now faces the task of implementing the strategic turnaround that Thompson proved unable to achieve.
The next section of the case provides an overview of the external environment McDonald’s faces. The economy continues to recover from the 2008–2009 recession, such that spending on dining out exceeded grocery sales for the first time ever in April 2015. However, while millennials are eating out more than ever, they are seeking increased quality and value and do not seem to think they can find that at McDonald’s. The company’s struggles are further compounded by health concerns, increasing supply costs, and a bevy of strong competitors.
Traditionally, McDonald’s main competition has come from other quick-service restaurants such as Wendy’s, Burger King, and Taco Bell. Each of these competitors’ stock is outperforming McDonald’s, presenting a worrying trend for the future. Subway presents a major challenge on the health front, and it has surpassed McDonald’s in the number of total restaurants. Meanwhile, the boundaries between quick service and other restaurant segments have become increasingly blurred. Due to their successful combination of high quality and reasonable prices, restaurants in the fast-casual segment (e.g., Panera Bread, Chipotle, etc.) are experiencing steady growth. Places like Five Guys, In-N-Out Burger, and Smashburger provide higher-quality and higher-priced burgers, attracting the premium end of the market. On the coffee front, McDonald’s competes head-to-head with places like Dunkin Donuts and Starbucks.
The typical American dines out five times per week, with breakfast being the least saturated of the three daily meals. McDonald’s three main target segments are mothers, children, and young adults. Moms view McDonald’s as a quick, easy, and affordable meal for families on the go (and they usu-ally bring the children). However, increasing concerns over childhood obesity have started to erode McDonald’s appeal. Young, single professionals who earn above-average incomes are considered “heavy users” who frequent a given chain once or twice per week, yet McDonald’s is not among their top ten preferred eating establishments. A lack of transparency and a series of food scandals (think “pink slime”) have also negatively affected the company’s image.
Easterbrook must confront several challenges if he is to return the company to its former glory. One concern is how to balance the need to introduce new items while addressing menu “bloat,” which makes operations more complex while slowing service times. McDonald’s food also has received some of the poorest quality ratings ever in the past year, which is part of the reason it is having trouble appealing to millennials (one of the largest target segments that has both the disposable income and desire to eat out). Compounding these issues is McDonald’s international notoriety, making it a prime target for labor activists who want the company to increase wages even further and who have filed suit to make headquarters liable for the labor practices of its franchises. In brief, the company is in the midst of its most serious identity crisis to date, and desperately needs to define a clear vision of what it wants to be and devise a plan for how to get there
Suggested Questions
Analysis: Focus on External and/or Internal Environments
Which trends in McDonald’s external environment are likely to have the greatest impact on the company’s ability to sustain a competitive advantage?
How is McDonald’s positioned vis-à-vis its major competitors?
Formulation: Focus on Business, Corporate, and/or Global Strategy
Which business-level strategy does McDonald’s employ? Is it effective? How so?
Which international strategy does McDonald’s employ? Is it effective? How so?
Implementation: Focus on Recommendations and How to Execute Them
How should Easterbrook adapt the organizational structure of McDonald’s to achieve his strategic plan?
Among all the roles played by strategic leaders, which one(s) will be most important as Easterbrook implements his strategic plan?
Explanation / Answer
Which trends in McDonald’s external environment are likely to have the greatest impact on the company’s ability to sustain a competitive advantage?
Two Major external Environment factors are
The macro-environment includes
Social, cultural
Legal
Economic
Political
Technological.
Within this are included factors such as demographics, green issues and larger societal and environmental forces.
The micro-environment includes
Environmental constraints, such as the structure of the market, the suppliers, customers, trends of the market, the public and competition.
How is McDonald’s positioned vis-à-vis its major competitors?
McDonald is positioned the worst in regards to its major competitors in terms of service, foods, and innovation. Even though McDonald is the largest in the industry, it has been following behind its competitors. Burger King is the third world’s largest in the industry and is doing well compared to McDonald is their usage of simplicity in extending their product lines. Burger King is innovated because the company only adds different sauces, bacons, and cheese to the core menu items. And not only that, it was successful in offering limit time and attractive promotions to entice it customers without slowing down service time. Another competitor of McDonald, Wendy, differentiate itself in the industry by being “a cut above” its competitors. The company offers higher-quality food that is made fresh-to-order. It success is by employing a “barbell” approach to products and pricing. They lure cost-sensitive customers in with value-based burgerswhile offering higher-end, premium items. Besides that, they also a much faster service by having an average of 1 minutes less service time compared to McDonald’s 189.2 seconds
Which business-level strategy does McDonald’s employ? Is it effective? How so?
McDonald’s in its primary markets consists of cost leadership and brand differentiation. McDonald’s keeps their business level strategy fresh by innovating both products and their markets as well. This is very effective because, the business level strategy is supported by its functional strategies which include McDonald’s ability to attain and maintain superior efficiency, quality, innovation, and customer service. Their efficiency is demonstrated in their assembly line process for making the food along with mechanized processes that require little knowledge or input from a human user. Their quality is very consistent and this is possible thanks to their third party food distributor. Additionally, they continue to innovate, as we see with introductions such as those of McCafe and the Shamrock Shake. Other innovations include the McGriddle, Snack Wraps, and breakfast on the go.
Which international strategy does McDonald’s employ? Is it effective? How so?
McDonald adopted 2 major international strategy to reach each corner of world
First, with a franchise business model that allows its franchisee-members, management and shareholders to share the risks and rewards from the discovery and exploitation of new business opportunities—McDonald’s model has become the norm for other franchise organizations.
Second, by adaptation and innovation, coming up with fresh products and services to address the needs of a diverse consumer market—as shaped by demographic, economic and local factors around the world.
The strategy of McDonald became trend setter for others.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.