Samanvita Chakka

IBM 301

McDonald’s Case Analysis

Chakka

Synthesis

Although it initially grew with only one simple product, McDonald’s only took

seventeen years to be a billion dollar business. When the CEO of McDonald’s, Ray Kroc,

took over the business, the number of outlets had multiplied to 2,272 and sales were

increasing beyond one billion dollars.

Not only was McDonald’s becoming popular in the United States; the business

itself was proliferating overseas. By the year of 1995, “the company had 7,012 outlets in

eighty-nine countries of the world, with Japan alone having 1,482 (130). The success of

attributed to its international enterprise, which contributed forty-seven percent of the

sales of the company and fifty-four percent of its profits.

To expand its business, McDonald’s was able to diminish its costs by twenty-six

percent through balancing building materials, equipment, and simple building layout. It

located its restaurants worldwide through established, common places, such as airports. It

also collaborated with other major companies to endorse and develop each other’s

brands, such as Chevron and Disney (131).

Due to McDonald’s sales and advertising throughout the world, the company

quickly emerged to be one of the biggest and most successful franchises. During the year

of 1996, McDonald’s had one hundred and twenty-six quarters of continuous record

earnings. By the end of the year, international businesses were the actual cause of the

company’s prosperity, giving forty-seven percent of its sales and fifty-four percent of its

profits (131).

As McDonald’s unexpected progression increased, franchises were dubious of the

headquarters’ proclamation that no other company would lose its business as McDonald’s

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opens more restaurants because the market fluctuates proportionately. Franchises worry

about the diminishing of their sales if a McDonald’s opens near them. Moreover,

McDonald’s started using Franchising 2000, a contemporary set of business practices

started by corporate headquarters, to carry out a single pricing strategy everywhere. For

example, a Big Mac would cost the same price in all places (133).

However, despite the all the success, McDonald’s had five quarters of decay in

sales by 1996. McDonald’s was popular when it comes to family with little children. Be

that as it may, as soon as the kids get older, the customers shift their loyalty to another

place. As a result, to win back its customers, McDonald’s spent $200 million promoting

its new product: the Arch Deluxe line of beef, fish, and chicken burgers. Unfortunately,

this became a failure, along with other products, and the company was under new

management by Jack Greenberg (133).

Greenberg began diversifying by buying different chain of restaurants. However,

the company still had only one percent of same-store sales growth. The main cause for

this was thought to be having the same menu. In 2001, the study in University of

Michigan revealed that conditions of McDonald’s have declined since 1995. Customers

were disappointed with slow service, incorrect orders, filthy environment, and uncivil

employees. Consequently, due to competing franchises, only one hundred and fifty new

restaurants were added, big decrease from before (134).

In response, Greenberg tried to improve the business by focusing on gaining

variety of food. He paid the business into Chipotle, Aroma (a coffee-and-sandwich bar in

London), and the Boston Market chain. New products were created and appealing

regionally, than throughout the world. For example, the McBrat was a success in

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Minnesota and Wisconsin, while the McLobster Roll was an accomplishment in New

England. However, US sales only increased by three percent in 2000, while net earnings

decreased by seven percent (135). However, non-US restaurants still continued to make

progress for McDonald’s. International business contributed to a little more than fifty

percent of the overall income by 2000, with Japan especially becoming a profitable

market by serving 1.3 billion customers a year (136).

Greenberg’s attempts for rejuvenation resulted in selling large items for cheap

prices, proposing forty menu items, and investing one hundred and fifty-one million

dollars for US kitchens to make the food have a better quality. Nonetheless, sales

remained low, profits declined during seven quarters, and the stock price plummeted to a

seven-year low. In addition, response from customers to most of these attempts was

negative and business in foreign markets was also wavering. Germany was the biggest

European market, although McDonald’s growth in the country remained still due to the

competition from Burger King, which increased in business. Even in Japan, McDonald’s

business decreased to the decline in birthrate and the competition from local competition.

Similarly, the restaurants that Greenberg bought in his attempts were not obtaining the

anticipated profits (137).

Consequently, James R. Cantalupo succeeded Greenberg as CEO in 2003. His

duty is to recover sales and profit-growth throughout the company. Cantalupo demolished

some of high-profile projects that Greenberg started, such as, a one billion dollar

technology named Innovate. He cut down capital spending by forty percent through

closing weak operating restaurants and opening few new ones. Due to this, Cantalupo

increased the dividend by seventy percent (138).

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When Cantalupo passed away due to a heart attack in 2004, Charlie Bell moved to

the leading job. Unfortunately, Bell was diagnosed with colon cancer and had to quit his

job. Afterwards, Jim Skinner, vice chairman, became promoted to CEO. Skinner still

pursued the strategy targeting at improving the declining profit. Instead of opening new

restaurants, Skinner tried to improve the established ones. In his first two years,

McDonald’s stock, sales, and profit had risen continuously (138).

By late 2007, 6,500 of McDonald’s restaurants have been remodeled, with many

providing drive-through with two lanes, wireless Internet service, and digital ordering

screens. Along with the renovations, the company anticipated that addition of drinks

would add to $1 billion to McDonald’s annual sales (140).

Marketing Theoretical Framework

When applying the “SWOT” analysis to analyze McDonald’s business through

the years, it is vital to realize that the company became successful through its advantages

and despite its disadvantages. The SWOT analysis examines a company’s strengths,

weaknesses, opportunities, and threats.

Strengths of McDonald’s include its accessibility, consistent high-quality menu,

cordial employees, advertising, and its market’s target (mainly to families). With more

stores opening in convenient places, McDonald’s increased its accessibility and its

market share to the dismay of its competitors. Instead of constructing new places for its

restaurants, McDonald’s build its own business through creating restaurants in exiting

places, such as airports, hospitals, and zoos. The drive-through sales contributed to fifty-

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five percent of sales in the United States, which also meant less to spend on the seats

required inside (131).

The drive-through sales helped McDonald’s gain more area for indoor

playgrounds to appeal to many families (131). McDonald’s also used its advertising to

target mainly families and children by giving out small prizes with its meals and having

indoor playgrounds

McDonald’s also took over stores from weaker competition, therefore, expanding

its area and source of business even more. In 1996, the company bought 184 company-

owned Roy Rogers outlets and gained control of Burghy’s (a fast-food chain in Italy),

and supplemented seventeen restaurants from the George Pie chain (131).

In contrast to the strengths of the company, McDonald’s also had its fair share of

weaknesses. McDonald’s easily targeted children to its products, however, as soon as

they start getting older, the children will want to try new products at other restaurants.

Therefore, McDonald’s loses a vital source for prospering sales and business (133).

Similar to local restaurants, the business of non-US restaurants in Europe heavily

declined to the scare of the mad-cow hysteria (135).

Under the management of Greenberg, sales remained frozen and profits and stock

market prices dropped to a seven-year low. The war of prices within all burger chains

resulted in McDonald’s facing less profits with a little growth in sales. McDonald’s

business also declined in the foreign markets. Because McDonald’s target children and

families, sales in Japan fell due to the declining in birth rate. In domestic areas, the

restaurants Greenberg took over to increase diversity were not making the expected

income (137).

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McDonald’s incurred a lot of opportunities locally and nationally to improve its

business. Instead of going on a pricing war with its competitors, McDonald’s should have

spent more money to improve its existing products rather than gambling with the creation

of new meals. If it wanted to improve its variety, McDonald’s should have made food

that is similar to its competitor’s success and improve and diversify that product.

McDonald’s should have also added new products and make more combos, rather

than discounting to “keep up with Taco Bell’s value pricing” (133). It should have added

larger amounts of products for a reasonable price, rather than drastically cutting down the

pricing. For example, the company should have tried selling a better quality burger with

larger French fries for the same price as before.

Despite the numerous opportunities that McDonald’s gained, it still faced a lot of

threats among competing businesses, such as Pizza Hut, Taco Bell, and Burger King.

Wendy’s beat McDonald’s in cleanliness, service, value, and food quality. McDonald’s

also tried to provide more discounts for its products, mainly to be on par with Taco Bell’s

value pricing. Unfortunately, by 1995, promotions of cheaper prices were not winning

customers over (133). The foreign markets were also stopping the growth of

McDonald’s. As stated before, Germany was the biggest European market but

McDonald’s prosperity declined as the competition from Burger King increased (137).

Central Strategic Marketing

McDonald’s would have had ongoing success if it had effective strategic

planning. This constitutes of attention, creativity, and management commitment.

McDonald’s should have maintained an ongoing process in which managers make

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different motions, instead of forgetting about new planning until after some time because

the environment and its surroundings are constantly developing and the abilities are

progressing.

McDonald’s needed to improve on its variety of products. When the company

first emerged, it only sold different types of burgers and fries. It should have started with

different varieties of food. Therefore, there would be more opportunities for success,

instead of basing their profits on one product: burgers. Instead of improving on only the

burgers, McDonald’s could have made its own types of burrito, sandwiches, etc. Some

may be successful while others may not. However, McDonald’s could diversify and

further improve on their existing, popular products. This method would provide various

possibilities of success.

McDonald’s needed sound strategic planning in the beginning and throughout the

years. Sound strategic planning is based on creativity. Managers need to break automatic

presumptions about the products and the firm and build new methods to make progress.

McDonald’s should also have been reacting quickly to the changes in the markets to see

what the different flavors and tastes customers want.

Viable Alternatives

There are three viable alternatives to strategic decision-making: Ansoff’s

Opportunity Matrix, the Boston Consulting Group model, and the General Electric

model. Ansoff’s Opportunity Matrix connects products with the markets. Business firms

can achieve this by using one of these four options: market penetration, market

development, product development, and diversification. Market penetration would try to

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increase market share among existing customers. Market development attracts brand new

customers to the products that are already there. Product development promotes the

invention of new products for the regular customers. Lastly, diversification entails the

introduction of new products to new customers.

The Boston Consulting Group’s portfolio matrix differentiates each strategic

business unit by its current or future growth and market share. This follows the theory

that market share and profitability are generally linked. The measure of market share is

known as the relative market share (the ratio between the company’s share and its biggest

competitor’s share).

The Boston Consulting Group’s matrix breaks also strategic business units into

four categories: stars, cash cows, problem children, and dogs. A star is a fast-growing

market leader. Star SBUs generate a lot of profits but need a lot of money to finance the

speedy development. A cash cow is a strategic business unit that produces more cash that

it needs to retain its market share. Problem child, also known as a question mark,

indicates a fast growth but shows small profit margins. Lastly, a dog is business unit that

has a minor potential for growth and little market share.

Lastly, the third model for choosing strategic alternatives is the General Electric

Model. The characteristics of an attractive market include high profitability, rapid

growth, lack of government regulation, consumer insensitivity to a price increase, a lack

of competition, and availability of technology. This model characterizes the market

attractiveness and the business position into three levels-low, medium, and high.

It would be best for McDonald’s to consider the Ansoff’s Opportunity Matrix at

the time of this case scenario. It is stated that McDonald’s was ranked low on the quality

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of its food, service, value, and its neatness (133). Therefore, Ansoff’s Opportunity Matrix

can help McDonald’s achieve greater profit by mainly improving its product

development and diversification, such as introducing new products and making fresh

combos with the existing products.

Implementation, Evaluation, and Control Issues

McDonald’s should implement the Ansoff’s Opportunity Matrix by using market

penetration. McDonald’s should try to convince the customers to consider their products

in a different way. For example, instead of battling with Burger King, with the quality of

burgers, McDonald’s should use its product to advertise to its customers in a new light.

One way could be introducing a new item, such as a breakfast burger. This method would

help McDonald’s create a new dimension and image with its customers.

McDonald’s should also implement the Ansoff’s Opportunity Matrix by inventing

its new products to the diversification of the majority. For example, the company could

invent products to the likes of new customers, such as making its food spicier to satisfy

the appetites of people who enjoy eating hot and spicy meals. At the same time, it should

offer the simplicity of some meals, such as French fries, to people who eat consistent

types of food.

After giving the new products a trial run with its customers, McDonald’s can use

the opinions of the items to figure out which ones are successful and which aren’t. It

would help the company better understand the preferred tastes and flavors of its

customers. McDonald’s will have an easier time interpreting the overall likes and dislikes

of customers.

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After McDonald’s figures out the preferences of its customers, it could eliminate

the products that have failed in opinion and build products based on the success of its

previous moneymaking product. The new products and the old, successful products could

have similar tastes with a little more variety. This way, McDonald’s would have better

control on the expectations of its customers and products, rather than creating a

completely different product and taking a gamble on its fortune.

Overall, McDonald’s should use its popularity as a foundation for improving its

business. It should adapt itself to the mindset of its customers because in the end it is the

customers who will decide on the fate of the business. Therefore, McDonald’s should

learn from its failed attempts and improve on its successful ones.

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