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