Mc Donalds Strategic Analysis PDF

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McDonald’s Corporation Strategic Analysis

Raul Andino April 14, 2015 Dr. John Cirone Strategic Organizational Leadership

BA 680

Table of Contents Company Background 3 Overview 2 Strategies and Objectives Current Challenges

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Situational Analysis

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Environmental Scanning

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Stakeholder Analysis 10 Industry/Competitor Analysis

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Porter’s Five Forces Model 13 Perceptual Map 15 Competitive Intelligence Matrix

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Best Practices Benchmarking16 Internal Assessment

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SWOT Analysis 18 Company/Product Portfolio (BCG Matrix) Competitive Advantage Continuum 23 Balance Scorecard

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Organizational Structure Recommendations Bibliography

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McDonald’s Corporation Company Background Overview McDonald’s is a leader in the quick-service food industry. As a leader McDonald’s is committed to providing the highest quality food, superior service, great value and a clean welcoming environment (QSC&V strategy). McDonald’s concentrates on a sustainable business model energy focused on energy conservation, and waste reduction. Founder Dick and Mac McDonald opened the first McDonald’s restaurant in San Bernardino California in 1948. The location opened as a self-service drive-in restaurant serving only 9 basic items including: hamburgers, cheeseburgers, soft drinks, milk, coffee, potato chips and a slice of pie. The most popular item was the classic hamburger sold for $0.15 (About $1.50 in 2015). It was not until 1 year later that McDonald’s introduced their World Famous French Fries in 1949.1 McDonald’s was reorganized as a corporation with the opening of its second location in Des Plaines, IL on April 15, 1955 by Ray Kroc. Kroc purchased the chain from the McDonald brothers and was the head of its successful growth for years to come (Until his death in 1984). McDonald’s is currently headquartered in Oak Brook, IL. Ray Kroc concentrated on expanding the private business until 1965 when it made its first initial public offering (selling at $22.50 per share). At this time McDonald’s had already expanded to nearly 700 locations throughout the United States. The first international restaurants opened in Canada and Puerto Rico in 1967. Today there are more than 36,000 McDonald’s restaurants located in more than 100 countries (80% of these locations are franchised). Vision/Mission Statement McDonald’s mission is, “to be our customer’s favorite place and way to eat and drink.”2 Values To accomplish its mission McDonald’s has also developed the following core company values: We place the customer experience at the core of all we do. Our customers are the reason for our existence. We demonstrate our appreciation by providing them with high quality food and superior service in a clean, welcoming environment, at a great value. Our goal is quality, service, cleanliness and value (QSC&V) for each and every customer, each and every time. We are committed to our people. We provide opportunity, nurture talent, develop leaders and reward achievement. We believe that a team of well-trained individuals with diverse backgrounds and experiences, working together in an environment that fosters respect and drives high levels of engagement, is essential to our continued success. 3

We believe in the McDonald’s System. McDonald’s business model, depicted by our “three-legged stool” of owner/operators, suppliers, and company employees, is our foundation, and balancing the interests of all three groups is key. We operate our business ethically. Sound ethics is good business. At McDonald’s, we hold ourselves and conduct our business to high standards of fairness, honesty, and integrity. We are individually accountable and collectively responsible. We give back to our communities. We take seriously the responsibilities that come with being a leader. We help our customers build better communities, support Ronald McDonald House Charities, and leverage our size, scope and resources to help make the world a better place. We grow our business profitably. McDonald’s is a publicly traded company. As such, we work to provide sustained profitable growth for our shareholders. This requires a continuous focus on our customers and the health of our system. We strive continually to improve. We are a learning organization that aims to anticipate and respond to changing customer, employee and system needs through constant evolution and innovation.3 Strategies and Objectives Growth Strategy In the past McDonald’s focused aggressively on expanding to new international emerging markets. These efforts were accomplished mainly through a successful franchising model. Today McDonald’s serves more than 69 million customers worldwide on a daily basis. Through its presence in 118 countries McDonald’s derives almost 68%4 of its sales from its international markets and hedges some of the risk involved with the highly competitive US market.5 Still McDonald’s is mindful of the importance of keeping its position as a leader in the developed markets it participates in. McDonald’s has stated that their current strategic focus is geared toward developing the markets where they already do business in. This is being done by reaching out to customers in the area through aggressive marketing campaigns, changing the physical image of stores, and appealing to current market trends in the population. McDonald’s goal is “to become the customer’s favorite place and way to eat and drink by serving core favorites such as our World Famous Fries, Big Mac, Quarter Pounder, and Chicken McNuggets.” To accomplish this goal “McDonald’s worldwide operations are aligned around a global strategy called the Plan to Win, which center on an exceptional customer experiencePeople, Products, Place, Price, and Promotion. We are committed to continuously improving our operations and enhancing our customers’ experience.”6 The Plan to Win is described below: People: From its beginnings founder Ray Kroc stated that “we are not in the people hamburger business, we are in the people business”. McDonald’s strives to serve its customers 4

through high quality food and exceptional customer service. From the moment a customer walks in, McDonald’s wants the customer to feel at home from the way they are treated to the food they taste. McDonald’s also states they provide opportunities for their employees to receive on-thejob training and advance in their careers. Correctly approaching consumer relations is key to the continued success of the business. Products: One of the key elements of McDonald’s success, and in fact any quick-service restaurant, is the consistency of product offerings. By offering the same quality, and taste in the products McDonald’s has been able to achieve immense brand recognition around the world. McDonald’s has also been able to break cultural barriers by expanding their menu to give product offerings that appeal to the specific culture where the restaurants are located. This is done by giving different franchise operators freedom to give input on new product ideas that can be successful.7 Some examples include the Indian market where McDonald’s offers the Maharaja Mac instead of the renowned Bic Mac for customers who do not eat meat. In the Latin American market, specifically in Honduras, McDonald’s offers refried beans and tortillas since it is a popular breakfast item in the country. Place: Global operations demand that McDonald’s implement a global supply chain strategy to ensure standardized product offerings. The chain is committed to balancing the interests of suppliers, employees, and franchise owners. McDonald’s treats its suppliers with loyalty and trust and expects the same back. McDonald’s also oversees that the 3 E’s of supply chain management are implemented in all their relationships (Ethics, Environment, and Economics).8 Through these efforts McDonald’s works with local suppliers to increase their capacity, develop sustainable practices, and promoting environmental friendly practices. The result is a strong bond of loyalty between local chains, suppliers, and employees. Price: Price is one of the most important factors to consider when looking at McDonald’s. As a quick-service chain McDonald’s has opted to adapt a low-cost leader strategy. Being a low-cost leader can be tough especially during recessions and inflationary periods. McDonald’s has showed they can focus on low cost strategies with the implementation of saving menus such as the Dollar Menu. When going into new markets McDonald’s needs to be aware of the price differences for different goods, and price their products accordingly. Promotion: McDonald’s has several product offerings, and has also developed seasonal products that help heighten costumer interest. Examples of these promotions are the seasonal offerings of the McRib and the Shamrock Shake. Additionally successful marketing campaigns have helped McDonald’s achieve the position it is at today. Marketing Strategy On January 2015 United States Chief Marketing Officer (CMO) Deborah Wahl announced that McDonald’s is taking new strides to meet customer demands. McDonald’s is shifting from a Billions Served strategy to a Billions Heard perspective. With the Billions Heard perspective McDonald’s will try to meet customer demands for change for their products. These demands will be addressed with new products offerings and having an open door policy regarding food practices. 5

To battle the negative customer perception McDonald’s is emphasizing the Our Food Your Questions program. McDonald’s is communicating with customers through blogs and educational videos to inform them of their business practices. Emphasizing healthier options like salads and wraps to please health conscious consumers is a key focus for the future of the business. On December, 2014 McDonald’s also announced a plan to develop a Create Your Taste platform. Customers in restaurants will have the option to build their own burgers from scratch without having to decide from specific items on the menu.9 Wahl also highlighted the importance of McDonald’s motto I’m Lovin’ It. McDonald’s is reminding customers that they are the life of the company, and that their satisfaction is their mission. This love for the customer will be communicated through product enhancements (Through upcoming changes to the Big Mac and Quarter Pounder with Cheese) and having open communication with consumers of where their food is coming from. Financial Strategy The Financial strategy McDonald’s is approaching is geared towards creating a leaner organization with a focus on key business processes. In order to focus on growth initiatives and create customer value McDonald’s plans to continue refranchising its restaurants. This year (2015) McDonald’s plans to refranchise 400 restaurants from its 3 year plan of 1500. This refranchising plan represents a more than 50% increase compared to the prior three year period.10 The 2015 capital expenditures are forecasted to be $2 billion. This figure represents nearly a $1 billion decrease from 2014. The reduction in capital expenditures is driven mainly by an $800 million reduction in new restaurant openings. The reductions will be implemented in the following markets facing challenging times: China, Russia, US, and Germany. From the $2 billion budget, half of the amount will be invested in new restaurant openings. The other half of the apportionment will be used for restaurant reinvestment, mainly restaurant reimaging. To return value to its stockholders, McDonald’s is planning to return between $18-20 billion during the 2014-2016 period. These returns will be in the form of dividends and the continuation of a stock repurchasing program.

Current Challenges Intense competition in the restaurant industry has caused the worst sales decline of the past 10 years for McDonald’s incorporated (2014 Revenue Growth -2.4%). New restaurants in the industry seem to have more attractiveness to the modern consumer (Millennials). A more health conscious and price sensitive population is shifting from McDonald’s seemingly unhealthy offerings compared to other competitors with healthier options at similar price points. McDonald’s needs adapt to changing customer demands. McDonald’s needs to find a way to restore trust in customers regarding the origin and quality of its products. Recent supplier

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scandals have driven a decrease in consumer confidence for McDonald’s products in Asia, which could also affect customer perspectives in the US market.

Situational Analysis Environmental Scanning Demographic Emerging Economies such as India, China, and Latin America are contributing to an increase in middle class population. This creates new opportunities for US businesses to enter developing markets. According to the OECD middle class growth will surge from 1.8 Billion in 2009 to 3.2 Billion in 2020 and 4.9 Billion by 2030.11 Homi Kharas from the Brookings Institution estimates that European and American middle class will shrink from 50% of the global total to just 22% by 2030.12 By this year Asia is estimated to house 64% of the global middle class. Stagnant living conditions and declining middle class for OECD countries will influence future growth as companies look for new opportunities in developing markets.

United States Population Projections Population growth in the US is projected to grow from 314 million in 2012 to 400 million by 2050.13 Population aged 65 an older will grow from 43.1 million in 2012 to 83.7 million by 2050. An aging population will bring new challenges to public welfare, Medicare, and Social Security systems in the United States with effects in businesses and health care providers. Ethnically, the United States will continue to become more diverse in the years to come with declining non-Hispanic white population. The biggest portion of growth from 2010-2017 is expected to be from the Hispanic population. Hispanic population will grow from 12.55% of the total to 18.40% in 2017.14 Other ethnicities are also expected to grow but in more modest amounts. Economic

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Global economic performance can affect the price of commodities, and adversely impact McDonald’s cost structure. There are positive cost reduction opportunities in 2015 related to the decrease of fuel costs. At the end of 2014 the cost of crude had fallen to a 4 year low of $66 per barrel (WTI crude). The prospects for the year also look favorable for fuel consumers; the 1-year futures prices for WTI (NYMEX) closed at $50.79 per barrel on 4/9/2015.15 Global GDP growth is projected to be 3.3% 2015, an increase of 0.1% from 2014. The United States is forecasting a 2.9% GDP growth (2.4% 2014).

With improving living condition and growing emerging economies global food consumption is also expected to change in the coming years. In US food consumption is estimated to grow 4.1% per year (2014-2018).16

The FAO is projecting per capita growth of meat and dairy products could increase by more than 44% by 2030 creating trade deficits. The deficit of in meat products is predicted to rise from 1.2 million tons per year (1997-1999) to 5.9 million tons by 2030. Milk products deficit will also increase from 20 million tons to 39 million tons for the same time period.17 These trade deficits could cause changes in the economic climate bringing an increase in the price of these commodities. Political/Legal The political and legal environment is extremely important for the operations of any business. Particularly for the quick-service restaurant category there are risks inherent with the 8

possibilities of new or changing regulations. McDonald’s can face risks worldwide with legal demands of different governmental institutions. The areas where McDonald’s can be affected are:    

Change in laws regarding packaging and accurate food labeling. Changes regarding property, franchise, tax, and employment regulations. Food standards imposed by regulators (FDA in the US) Changes in accounting and financial practices can affect the financial condition of the business.

McDonald’s needs to ensure compliance with regulations in the various markets where conducts its business. For example in the United States McDonald’s has to comply with FDA regulations regarding food sourcing, preparation, and accurate labeling. Examples of regulations are stated below:  

On August, 2010 the FDA released guidelines to food producers to accurately represent nutritional information to its customers (FR Doc No: 2010-1630).18 McDonald’s needs to abide by General Accepted Accounting Principles (GAAP) in the United States, and by IFRS standards in its international locations when preparing accounting statements.

Sociocultural McDonald’s is facing pressures from a changing customer perspective. There is a healthconscious movement today in the United States, and a greater concern for sustainable methods of food production. Customers are now realizing the importance of a balanced diet and are gravitating towards “healthier” options and restaurants that source their food from sustainable suppliers (ex: Shake Shack). Technological Technological innovations in the transportation industry open up possibilities to reduce costs in the area of fuel consumption and create a good brand image through the use of sustainable fuels. The current trend in the market is headed towards the use of Natural Gas as a main source to power trucks. In September 2014, Clean Energy Fuels Corp (US) made an agreement with Bimbo Bakeries to provide the first natural gas powered trucks reducing greenhouse gas emissions by 580 metric tons after initial deployment.19 This brings new opportunities for other industries in the use of natural gas powered vehicles in supply chain operations. The US Department of Energy, there are currently 15,129 (December 2014) alternative fuel stations, with more expansions planed. McDonald’s is always at the front when it comes to innovation within its restaurants. With the newly hired Chief Digital Officer Atif Rafiq McDonald’s is looking to implement new technologies in their restaurants. The advent of the Smartphone era brings new technologies and possibilities for fast-food ordering. McDonald’s can look to develop applications to speed ordering and even create ordering platforms to order food before the customer arrives at the 9

restaurant.20 Using touch-screen technology could also speed up the process, and allow customer to order food with touch-screen kiosks instead of having to order at the counter. Stakeholder Analysis Internal Stakeholders Owners/Operators (Franchisees) Most of McDonald’s locations are franchised. McDonald’s needs to ensure that a positive relationship exists within its franchise system to ensure food quality and exceptional service. Successful franchise operations are crucial for creating a positive brand image. Franchisees are also interested in the well-being of their investment to achieve a positive return. Employees Employees have an important stake in McDonald’s since this is the major source for their income. Company employees working worldwide totaled 420,000 in 2014.21 Total employees including franchise employees totaled 1.9 million, the second largest employers behind Walmart.22 McDonald’s employees are looking to have a safe working environment, opportunities for advancement, and fair wages. External Stakeholders Customers For McDonald’s correctly engaging the customer is pivotal for successful operations. McDonald’s Plan-to-Win is focused on maintaining the customer as the center of all new initiatives. For any quick-service business, customer taste, preferences, and views of the business are key drivers for success. To remain relevant to its customers McDonald’s focuses on:  Optimizing its menu offerings  Modernizing the customer experience. This can be seen with the new initiatives McDonald’s has taken to establish a new technology strategy with the leadership of Atif ...