It would be impossible to describe the previous century without mentioning McDonald’s. Its golden arches sign is as ubiquitous as other symbols of modernity. Since its early beginnings many decades ago this company has now become a conglomerate that spans the globe. In fact, in 1992 McDonald’s sold its 90 billionth burger and the company did not bother to count ever since (Shamsie, 2009, p.25). But in 2002 the corporate leaders of this company came to realize that things can change so quickly.
In that same year, McDonald’s posted its first quarterly loss amounting to $343.8 million and that is not a small amount (Shamsie, 2009, p.25). One of the top managers explained the decline in just a few short words when he remarked “We were hip 15 years ago, but I think we lost that” (Shamsie, 2009, p.27).
In other words there was a time when McDonald’s was a dominant force in the fast-food industry but now a slowdown in the economy and a host of other problems worked in unison to help weaken its position. It is now time for the company to bounce back from defeat and be in the forefront of the fast-food industry once again.
This paper will attempt to outline an analysis of the various forces at work within and without. In order to develop a battle plan that will transform the organization from one that is behaving in a mediocre manner into a company that is on top of the world once again. It has to be pointed out that in recent years corporate leaders at this company tried their best to turn things around.
This study is just a small contribution to that endeavor. In this study, strategic management principles will be utilized and hopefully the final product can be added into the other strategic papers being compiled to solve McDonald’s woes.
It was discovered by researchers that the company began to lower its standards when it decided to expand globally in the 1990s (Shamsie, 2009, p.24). As a result the head office stopped evaluating its franchises in terms of cleanliness, speed, and service (Shamsie, 2009, p.24).
Aside from negligence ,the company’s strategy to diversify and provide different types of products such as those that are not related to their main burger business was seen to have a negative effect on the company. This is made more problematic by the fact that McDonald’s decided to acquire non-burger fast-food chains that did not make money for the organization.
As mentioned earlier the problems lie in the lack of focus, spreading itself too thin and acquiring non-burger chains that are losing money. In order to take a better grasp of the challenges that the company faces it would be best to use Porter’s Five Forces. In Porter’s 5 forces there is a concept called entry barriers (Hax, 2001, p.43).
If one will use this theoretical framework to understand the nature of competition in the fast-food industry then it will be discovered that there is a high barrier for entry when it comes to the development of a fast-food chain.
A huge capital expenditure is needed to compete at the level of McDonald’s. The company is relatively safe in this area, meaning it is not realistic for a competitor to suddenly challenge a company as established as McDonald’s and create a fast-food chain that will ultimately lead to the demise of McDonald’s.
Going back to Porter’s Five Forces, one will come to understand that the more urgent issue to resolve is not the entry of giant-sized competition but the threat of substitutes.
It is a significantly fragmented market and the company faces competition from restaurants that offer better tasting and more nutritious foods as well as from other fast-food outlets such as quick meals that can be found in supermarkets, convenience stores, and even vending machines (Shamsie, 2009, p.23).
The company does not face any significant problem when it comes to their suppliers. Aside from the fact that the prices of goods are increasing, McDonald’s can get better terms from their suppliers because of its size (Kincheloe, 2002, p.73).
It can demand competitive pricing for the raw materials needed such as meat, fruits and vegetables and it can be assured of a good deal from them. The suppliers do not have the capability to pressure McDonald’s to abide by their terms. The size of the company allows it to have leverage against suppliers.
However, even suppliers cannot control external forces. For example the rising prices of fuel will automatically increase the prices of the goods that they will deliver to McDonald’s and as a result the company will have to absorb these price increases.
While it is true that McDonald’s does not have to contend with major issues when it comes to their suppliers, it is the buyers that that they have to worry about because they have a wide range of competing products to choose from. There also quick meals being offered in supermarkets such as those that are made available through vending machines. The uniqueness of McDonald’s service is not that attractive anymore.
The fast, clean, and efficient service offered by the company can be easily matched by others. It does not even require a competitor to build a system similar to McDonald’s in order to succeed. Even small competitors can easily take a slice of their market share. If the buyers decide to patronize a medium-sized enterprise offering fast-food service then this can really hurt the company’s bottom-line.
Finally, McDonald’s has to worry about the competition. For instance, if rival firms will adopt the cost leadership strategy of McDonald’s then both firms will suffer significant losses. If a competitor is willing to go down this path then McDonald’s will have to find the competitive edge to stay profitable.
One way to do this is to improve their main product which is the hamburger. Therefore, the company does not have to continuously lower the price to match that of the competition. The company has to market their burgers as the best in terms of price and value.
Another way to analyze the company’s strengths, weaknesses and overall performance is to utilize internal analysis techniques such as the 7-S framework which stands for:
Shared Values – In the 7-S framework “shared values” is positioned in the centre, it is also known as core values or the central beliefs of the company;
Strategy – this is the plan that will guide the allocation of scarce resources to reach a particular goal;
Structure – this is how an organization is structured whether it is centralized, top-down, decentralized, a matrix, a network etc;
Systems – this talks about the procedures, processes and routines that must be observed in order to keep communications flowing and also to finish tasks that are of significance;
Staff – this is of course the number and type of personnel within the company;
Style – this is more about the culture of the organization and has a lot to do with management styles; and
Skills – the capabilities of the personnel and what it can achieve if taken together as a whole unit (McKinsey, 2009, p.1).
The use of the 7-S framework will reveal what the company stands for and why it was so successful for many decades. By utilizing this tool researchers will be able to know the history of the company and what was done in the past that was proven to be effective. In times of crisis it would be of great help to remember the old adage that if something is not broken then there is no need to fix it.
There is a need to collate data from thee fiscal years, from 2008 to 2010. This will include total revenue for the past three fiscal years. There is also the need to determine the gross profit, operating income or loss, net profit, total assets, total liabilities, and finally net tangible assets.
Aside from the financial side, researchers must also look into the type of products being offered and how did the customers responded to new and old products that were offered in the past three years. This information will provide an overview concerning the economic health of the company and what can be done in terms of developing a turnaround strategy.
After sending out researchers and coordinating with corporate leaders handling the company’s management information systems it was discovered that the company is in trouble if one will compare its performance in the 1990s. Yet, there is hope for this company. Nevertheless, the encouraging news about positive development in recent months is not enough to assuage the fears of the investors and shareholders.
It is true that the company is not yet near bankruptcy. Based on net income between fiscal year 2008 and 2010 it is not a surprise to find that the company is profitable by at least 4.3 billion but since 2008 the growth is minimal.
In fact in fiscal year 2008 the company reported that its earning was significantly lower compared to what it earned a year earlier. However, this is not the most disturbing sign for McDonald’s. The real source of concern can be found if one examines the assets of the company. In 2008 the net tangible assets was valued at an estimated $13.25 billion but in 2010 the value is only $11.15 billion.
Aside from that the company added more long-term debts. Thus, in 2010 total liabilities amounted to at least $15 billion. It is clear that the value of the company is declining. This is reflected by the price of the stock which in 2008 dropped very significantly.
The turnaround strategy that the company must use can be understood if one will study the generic strategies formulated by Porter. The first strategy that McDonald’s should utilize is the cost leadership strategy (Porter, p.35). For example, the company should focus more on their Dollar Menu, selling food products that are affordable and yet great tasting and promotes customer loyalty.
Going back to Porter’s generic strategies, the company it was discovered that the company attempted to use a differentiation strategy by creating diverse types of products. It must be made clear that this is not one of the best solutions to the company’s woes.
It seems that the company is not keen in applying a focus strategy because of the diversified product offerings as born out of previous decisions to push the company to different directions in response to the idea that mass marketing no longer works.
But is clear that a differentiation strategy is weakening the position of the company and that there is a need to refocus on what McDonald’s does best and it is none other than selling burgers.
Using principles gleaned from Porter’s Five Forces, Porter’s generic strategies and McKinsey’s 7-S Framework, researchers were able to have a big picture view of the company.
Its problems were traced to a misguided differentiation strategy, the lack of focus, negligence when it comes to customer service and overexpansion without the necessary corporate structure and team development needed to support such tremendous growth. When McDonald’s decided to expand globally in the 1990s the company headquarters found it difficult to monitor every single franchisee.
There is no way to grade these outlets in terms of service, speed and cleanliness. This explains the decline. The best way to solve this problem is to re-emphasize the fact that McDonald’s is not just offering food it is also offering a type of service. It is a fast-food chain and therefore there is a need to teach the value of cleanliness, speed and efficient service.
With regards to diversification, it may seem to be a good idea at first because it provides more choices for the customers. However, the quality of these products is suspect.
This simply means that McDonald’s is an expert in serving burgers and therefore find it difficult to immediately improve the quality of their new product offerings. It takes time to increase the company’s proficiency when it comes to dealing with the requirements necessary to serve non-burger products.
Aside from increasing the variety of their product offerings, McDonald’s also did something that forced the leaders to deal with so many things at the same time.
The company decided to acquire companies that are not related to the core expertise of the company. For example Chipotle Mexican Grill is very different from a McDonald’s store. It is time for the company to stop all these acquisitions and instead focus on improving the system and quality of service for each franchise registered under the golden arches brand.
Furthermore, McDonald’s cannot afford to launch any new product without going through a thorough and effective development process. Everything must be studied not only in the quality of the food but also on the packaging. The company must renew its commitment in terms of product development.
McDonald’s has to provide resources so that the company can focus on improving the way new products are studied and tested before releasing it to the market. The company cannot afford to offer anything that is half-baked. This lack of attention to detail will backfire on McDonald’s. The customers must not have any excuse to look for substitutes.
There is a need to implement a focus strategy. There is a need for the company to focus on its strength and that is their capability to sell burgers that are still in hot demand. It is time to sell the companies that they have acquired and focus only on the efficiency and quality of service provided by its restaurants all over the world.
There will be resistance to change. It must be expected to come from those who proposed that it is best for McDonald’s to buy non-burger fast-food chains. Resistance can also come from those who believed in diversification to the point of losing the company’s true identity and forgetting its vision to serve good tasting burgers at an affordable price.
Resistance can also come from franchise holders that are no longer interested in giving the best customer service possible and find it counterproductive to raise the standards of service and cleanliness to a very high level. The CEO as well as top corporate leaders of McDonald’s must invest in developing a monitoring system and a continuous training program especially when it comes to country managers responsible for maintaining strict quality standards for franchisees outside the United States.
Country managers must be targeted if the company is intending to change the image of the company on a global scale. This means that the company must invest in programs that will help understand the importance of culture.
The members of the board must lead the way when it comes to understanding differences in culture and the need to effectively managed multicultural teams. There must be a program that teaches top managers on how to deal with diversity within the organization.
The struggle in coping with the challenges of diversity is especially true for the expatriates that McDonald’s sent to handle their Asian and European business operations. The said training program should be instilled into the hearts and minds of the top-level managers who will be sent as expatriates to foreign countries. They must learn to respect, appreciate and manage diversity.
The company must emphasize the fact that marketing and other technical expertise is just part of the learning process; they must also learn the significance of understanding cultural differences. A brilliant leader will not go far if he or she does not have the necessary training to handle the shock that comes from dealing with a different culture.
The training program must teach top-level managers, middle-management and key leaders in the company to understand the meaning and importance of culture by being able to reflect on their own cultural bias and then use that to observe the cultural differences that exist around them. By doing so, they have achieved a level of awareness that will enable them to communicate effectively to team members in a multicultural team. As a result they are able to resolve conflict and enhance teamwork.
The success of the organizational implementation plan can only be seen if the company begins to increase revenue. This also means that the company’s assets are growing and not shrinking. This can be done if the company learns how to sell more burgers as opposed to other non-burger products.
This means that the company has understood the value of focusing on its strengths and not spread itself too thin. The keys to success would be an organization that prides itself on speed, cleanliness, efficiency and quality.
Progress can be monitored by constantly monitoring the value of the company not only by looking at the price of the company’s stock but also by having continuous access to financial information such as revenue, liabilities, and assets. The evaluation can only be completed if researchers are employed to determine the perspective of the buying public. There is a need to gauge customer loyalty and find out if they are happy with the company’s recent performance.
Finally, the planned change project can only be judged successful if the company has made an investment when it comes to developing multi-cultural teams that will help deal with cultural differences when it comes to franchisees located outside the United States.
The ability to manage cultural diversity will create an organization that is flexible to adapt to changes. More importantly it will allow the company to respond to customer needs.
It would be best for the current CEO to take a closer look at the proposed changes for the company. The gradual decline in company value for the past years is indicative of a deep-rooted problem that has to be dealt with as soon as possible. It has been revealed that the company spent a great deal of money acquiring non-performing assets.
It was also discovered that McDonald’s attempted to veer from its core business without great success. There is a need to revisit what it has done successfully in the past and try to learn from the time-tested strategies that made McDonald’s so successful that it continues to sell tens of millions of burgers on an annual basis.
Hax, A. (2001). The Delta Project: Discovering New Sources of Profitability in a Networked Economy. New York: Palgrave.
Kincheloe, J. (2002). The Sign of the Burger: McDonald’s and the Culture of Power. PA: Temple University Press.
McKinsey. (Mar. 2011). 7-S Framework. 12Manage the Executive Fast Track.
Retrieved from http://www.12manage.com/methods_7S.html
Porter, M. (1980). Competitive Strategy. New York: The Free Press.
Shamsie, J. (2009). Competitive Strategy. MI: Michigan State University Press.