ASSIGNMENT # 1 MCDONALD’S CASE STUDY

Lois C. Etete

Prof Tony Campo

BUS: 490

May 3, 2014

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Introduction

This document is going to give a brief history of McDonald’s company, it will also identify

McDonald’s objectives and strategies. This paper will explain one strategy McDonald’s might

use to take advantage of an external opportunity, and one strategy the company might also use to

address a potential threat. A Competitive Profile Matrix will be constructed. It will Include that

of McDonald’s and one or two (1 or 2) of its major competitors and at least six (6) success

factors that is believed to be critical to success in this industry will be mentioned. Lastly, An

External Factor Evaluation Matrix will be constructed to round off the paper.

Brief History of McDonald’s

The business began in 1940, with a restaurant opened by brothers Dick and Mac

McDonald in San Bernardino, California. Their introduction of the "Speedee Service System" in

1948 established the principles of the modern fast-food restaurant. The original mascot of

McDonald's was a man with a chef's hat on top of a hamburger shaped head whose name was

"Speedee." Speedee was eventually replaced with Ronald McDonald in 1963. (Addullah, 2009).

The present corporation dates its founding to the opening of a franchised restaurant by

Ray Kroc, in Des Plaines, Illinois on April 15, 1955 , the ninth McDonald's restaurant overall.

Kroc later purchased the McDonald brothers' equity in the company and led its worldwide

expansion and the company became listed on the public stock markets in 1965.

Today McDonald's Corporation is the world's largest chain of fast food restaurants,

serving nearly 47 million customers daily through more than 31,000 restaurants in 119 countries

worldwide. McDonald’s sells various fast food items and soft drinks including, burgers, chicken,

salads, fries, and ice cream. Many McDonald's restaurants have included a playground for

children and advertising geared toward children, and some have been redesigned in a more

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'natural' style, with a particular emphasis on comfort: introducing lounge areas and fire places,

and eliminating hard plastic chairs and tables. (Addullah, 2009).

Each McDonald's restaurant is operated by a franchisee, an affiliate, or the corporation

itself. The corporations' revenues come from the rent, royalties and fees paid by the franchisees,

as well as sales in company-operated restaurants. McDonald's revenues grew 27% over the three

years ending in 2007 to $22.8 billion, and 9% growth in operating income to $3.9 billion.

(Addullah, 2009).

1) Identify McDonald’s existing Objectives and Strategies.

Objectives:

McDonald’s first and main objective is to grow market share

We create a long term profitable growth for shareholders.

McDonald’s maintain a current debt to capital level s to 35-45%.

We decrease the selling, general, administrative and miscellaneous expenses.

We reduce the percentage of company owned units.

Strategies:

Franchising:

McDonald’s deal with the franchising schemes and own only 15% of total restaurants by the

company and remaining 85% are on franchising system. This will place their strategic planning

more easy to access them worldwide. (Corporation, 2012)

Tradition Follow in Taste:

McDonald’s follows the tradition and culture of the country where it enters. As in many Islamic

countries it provides with “HALAL” food or in places where vegetarian food is more traditional

being served by McDonald’s successfully. (Corporation, 2012)

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Product Taste and Consistency:

McDonald’s achieved the level of providing good, hygienic food to its customers with

consistency by maintain the quality of food and taste across the worldwide nations. (Corporation,

2012).

Strategy that the company might use to take advantage of an external opportunity:

Franchising:

McDonald's is planning to significantly increase its count of franchisee operated

restaurants. In 2011, the company made significant progress enhancing the mix of franchised

and company-operated restaurants, including executing developmental license strategy, to

maximize long-term brand performance and returns (Rubin, 2012)

Under a developmental license, a local entrepreneur owns the business, including control

of the real estate, and uses their capital and local knowledge to build the McDonald's Brand and

optimize long-term sales and profitability. The company collects a royalty, which varies by

market, based on a percent of sales, but does not invest any capital for new restaurants or

reinvestments. (Rubin, 2012)

The company has successfully used this structure for more than 15 years and had it in

place in 59 countries at for year 2011. In August 2011, the company completed the transition of

1,571 restaurants in Brazil, Argentina, Mexico, Puerto Rico, Venezuela, and 13 other countries

in Latin America and the Caribbean to a developmental license structure. The company refers to

these markets as Latham. (Rubin, 2012)

The buyers of the company's operations in Latham have entered into a 20-year master

franchise agreement that requires the buyers, among other obligations, to pay monthly royalties

commencing at a rate of approximately 5% of gross sales of the restaurants in these markets,

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substantially consistent with market rates for similar license arrangements; to add approximately

150 new McDonald's restaurants over the first three years and pay an initial fee for each new

restaurant opened; and to spend specified annual capital expenditures for existing restaurants.

In addition, the company transitioned another five small markets in Europe with a total of

24 restaurants to the developmental license structure in 2011. The company also made progress

in franchising certain company-operated restaurants in key markets. As a result of its

developmental license strategy and franchising initiatives, the percent of franchised and affiliated

restaurants worldwide increased from 74% at year-end 2010 to 78% at for year 2011. The

transition of company-operated restaurants to franchisees and developmental license structure is

likely to increase the overall profitability of McDonald's. (Rubin, 2012).

Strategy that McDonald’s might use to address a Potential threat

Competitive Pricing:

McDonald’s, because of its nature of business may get affected by price fluctuations in

beef, chicken and cheese, which are critical ingredients of the company's menu. The company

remains susceptible to increases in food costs as a result of factors beyond its control, such as

general economic conditions, seasonal fluctuations etc. So the company uses a conversion policy

of its price so that all the franchises worldwide would have the same prices. In this way

McDonald's sustain the level to achieve their profits in expressions of maintaining the breakeven

point of the company.  This helps them to evaluate the total cost and price of a single product.

(Rubin, 2012).  

2) Construct a Competitive Profile Matrix. Include that of McDonald’s and one or two (1

or 2) of its major competitors and at least six (6) success factors that is believed to be

critical to success in this in industry. 

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CPM- Competitive Profile Matrix

MCDONALD’S BURGER KING YUM BRANDS WENDY’sCritical Success Factor

Weight Rating Weighted Score Rating Weight

Score Rating Weight Score Rating Weight

Score

Price 0.15 4 0.60 3 0.45 3 0.45 3 0.45Financial position 0.08 4 0.32 3 0.32 3 0.24 2 0.16

Consumer Loyalty 0.10 4 0.40 3 0.40 3 0.30 2 0.20

Advertising 0.10 3 0.30 3 0.30 4 0.40 2 0.20Product Quality 0.10 4 0.40 3 0.40 4 0.40 2 0.20

Innovation 0.15 3 0.45 3 0.45 3 0.45 2 0.30Market Share 0.10 4 0.40 2 0.20 3 0.30 2 0.20

Management 0.07 4 0.28 3 0.21 3 0.21 3 0.21Global Expansion 0.15 4 0.60 2 0.30 3 0.45 1 0.15

TOTAL 1 3.75 3.03 3.20 2.07

(6) Success factors that is believed to be critical to success in this in industry.

Branding

McDonald's, Burger King and Wendy's are examples of extremely successful fast food branding.

Their signs, logos and slogans are recognizable around the world. Fans of fast food like

predictability, and they want to know exactly what they are going to get before they go through

the doors. By providing consistent, easily recognizable and simple branding, a business reassures

customers that nothing has changed. (Xaxx, 2006).

Location: - Fast food is about convenience, so to be successful a fast food outlet should be

located in a high-traffic area. Fast food isn't considered a destination; customers will not travel

into the countryside for a bag of fries in the same way that they would for a special restaurant

experience. By locating outlets in shopping malls and on busy commercial strips, fast food

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companies gain business and impulse purchases from customers who had no preplanned

patronage of the restaurant. (Xaxx, 2006).

Speed: - Fast food that lives up to its name gains more business than fast food that is actually

slow. Many people grab fast food on the way to work or to another destination. The reason that

drive-through windows are popular is that people don't even want to take the time to get out of

the car. The faster a restaurant can deliver the ordered food, the happier the customer is. Setting

up efficient and standardized kitchens and focusing on foods that can be cooked quickly are two

of the ways that McDonald's became so successful in this competitive industry. (Xaxx, 2006).

Efficiency: - Fast food restaurants run on thin profit margins and make their money by selling

lots of product. In this commercial environment, functioning efficiently is critical. This means

minimizing food waste, hiring help at minimum wage and benefiting from economies of scale

when purchasing supplies. Every dollar that is unnecessarily spent on operations is a dollar

subtracted from profits. Because of high employee turnover in the industry, training regimens for

new employees need to be standardized, rapid and effective. (Xaxx, 2006).

Customer Relation: - To have long term success in the quick service restaurant industry it is

necessary to build loyal consumers through a strategy of relationship marketing. The core of the

relationship marketing approach is that resources are directed toward strengthening ties to

existing customers on the proven premise that maintain existing customers is less costly that is

attracting new ones. (Kevin Mason, Stephen Jones, Mike Benefield, Jim Walton, 2013).

Food Quality: - Food quality was also found to be important to quick service restaurant

consumers. To be seen has having higher quality food, a quick service restaurant needs to offer

meals with fresh ingredients, reasonably high quality meats, and consistent delivery of food.

Therefore, restaurants need reliable vendors for their food ingredients and efficient ingredient

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supply chains. Also, meal preparations need ensure that the food has consistent tastes, consistent

portions, and is delivered at consistent temperatures. (Kevin Mason, Stephen Jones, Mike

Benefield, Jim Walton, 2013).

EFE- External Factor Evaluation Matrix.

Key External Factors

Opportunities Weight Rating Weighted Score

Growing health trends among consumers 0.08 3 0.24

Globalization, expansion in other countries(especially in

China & India)0.12 4 0.48

Diversification and acquisition of other quick-service

restaurants0.04 3 0.12

Growth of the fast-food industry. 0.10 3 0.30

Worldwide deregulation 0.04 2 0.08Low cost menu that will attract

the customers 0.08 2 0.16

Freebies and discount 0.08 1 0.08

ThreatsHealth professionals and consumer activists accuse

McDonald's of contributing to the country’s health issue of

high cholesterol, heart attacks, diabetes, and obesity.

0.10 3 0.30

The relationship between corporate level McDonald's

and its franchise dealers.0.09 3 0.27

McDonald’s competitors threatened market share of the company both internationally

and domestically.

0.12 4 0.48

Anti-American sentiments 0.07 2 0.14Global recession and

fluctuating foreign currencies. 0.04 3 0.12

Fast-food chain industry is expected to struggle to meet

0.04 2 0.08

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the expectations of the customers towards health and

environmental issues.Total 1.00 2.85

Reference

Addullah, F. S. (2009, June 02). McDonald's Case Study. Retrieved 05 03, 2014, from Scribd:

http://www.scribd.com/doc/16050821/McDonalds-Case-Study

Corporation, M. (2012). About McDonald's. Oak, Brook: McDonald's Corporation. Retrieved 05

03, 2014, from

http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/Investors

%202012/2011%20Annual%20Report%20Final.pdf

Kevin Mason, Stephen Jones, Mike Benefield, Jim Walton. (2013, October 13). Quick or fast

Service Restaurant Success Factors. Retrieved 05 03, 2014, from aabri:

http://www.aabri.com/OC2013Manuscripts/OC13086.pdf

Rubin, S. (2012, October 12). McDonald's. Retrieved 05 3, 2014, from Benziga:

http://www.benzinga.com/trading-ideas/long-ideas/12/10/2990918/mcdonalds-a-perfect-

hybrid-between-growth-and-value

Xaxx, J. (2006, May). Key Elements of Success in the Fast Food Industry. Retrieved 05 03,

2014, from smallbusiness: http://smallbusiness.chron.com/key-elements-success-fast-

food-industry-24913.html.

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