University of Jordan

Faculty of Business

Strategic Management

“McDonald's”

Case StudySTRATEGIC MANAGEMENT

Prepared By

Fathi Salem Mohammed Abdullah

2009

Table of Contents

PageTopics

3Introduction

3History analysis4Vision, Mission, Value

5The Five Forces Framework

6PESTEL Framework7External Audit8CPM-Competitive Profile Matrix9External Factor Evaluation (EFE) Matrix

10Financial Ratio Analysis

12Internal Audit13Internal Factor Evaluation (IFE) Matrix14SWOT Matrix15SPACE Matrix16Grand Strategy Matrix17The Boston Consulting Group (BCG) Matrix

17The Internal-External (IE) Matrix18The Quantitative Strategic Planning Matrix

(QSPM)20Recommendations

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Introduction:

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 'natural' style, with a particular emphasis on comfort: introducing lounge areas and fireplaces, and eliminating hard plastic chairs and tables.

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.1

History analysis:

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.

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

1 http://en.wikipedia.org. 3

brothers' equity in the company and led its worldwide expansion and the company became listed on the public stock markets in 1965.

With the expansion of McDonald's into many international markets, the company has become a symbol of globalization and the spread of the American way of life. Its prominence has also made it a frequent topic of public debates about obesity, corporate ethics and consumer responsibility.2

Vision

To be the best and leading fast food provider around the globe

Mission

McDonald's brand mission is to be our customers' favorite place and way to eat, and improve our operations to provide the most delicious fast food that meet our customers' expectations.

Values

Our values summarized in "Q.S.C. & V.". Provide good quality, services to customer. Have a cleanliness environment when customer enjoys their meal. The value of food product makes every customer is smiling.

2 http://en.wikipedia.org. 4

The Five Forces Framework

The Threat of Entrants

Large established companies with strong brand identities such as McDonald’s BKC, YUM, and WEN do make it more difficult to enter and succeed within the marketplace; new entrants find that they are faced with price competition from existing chain restaurants.

Bargaining Power of Buyers

Low bargaining power of buyers.

Bargaining power of suppliers

Bargaining power of suppliers within the fast food industry would be relatively small, unless the main ingredient of the product is not readily available.

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SuppliersSuppliers

SubstitutesSubstitutes

BuyersBuyers

Potential entrants

Potential entrants

Competitive rivalry

Competitive rivalry

Threat of Substitutes

This could range from a competitive fast food restaurant to family restaurant to a home cooked meal.

Competitive Rivalry The strength of competition in this industry is very high; the main rivals are BKC, YUM, and WEN. They compete with international, national, regional, local, retailers of food products (restaurants, quick service, pizza, coffee shops, and supermarkets).

PESTEL Framework:

Political:

The international operations of McDonald’s are highly influenced by the individual state policies enforced by each government.

Economic:

McDonald’s has the tendency to experience hardship in instances where the economy of the respective states is hit by inflation and changes in the exchange rates.

Market leader. Very high target market. Low cost and more incomes. The rate at which the economy of that particular state grows determines

the purchasing power of the consumers in that country.

Technological

Advanced technology development. Quality standards.

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Social:

Working within many social groups. Increase employments.

Environmental: Quality packing. Local manufacture using foreign supplies.

Legal:

Legislation for product. Sustained logo.

External Audit:

Opportunities Threats

1. Growing health trends among consumers

2. Globalization, expansion in other countries (especially in China & India).

3. Diversification and acquisition of other quick-service restaurants.

4. Growth of the fast-food industry.5. Worldwide deregulation.6. Low cost menu that will attract the

customers.7. Freebies and discounts.

1. Health professionals and consumer activists accuse McDonald's of contributing to the country’s health issue of high cholesterol, heart attacks, diabetes, and obesity.

2. The relationship between corporate level McDonald's and its franchise dealers.

3. McDonald’s competitors threatened market share of the company both internationally and domestically.

4. Anti-American sentiments.5. Global recession and fluctuating

foreign currencies.6. Fast-food chain industry is

expected to struggle to meet the expectations of the customers towards health and environmental issues.

CPM-Competitive Profile Matrix

  McDonald's Burger King Yum Brands Wendy'sCritical Success Factors

Weight Rating Weighted Score

Rating Weighted Score

Rating Weighted Score

Rating Weighted 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 0.10 4 0.40 3 0.40 3 0.30 2 0.20

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LoyaltyAdvertising 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 0.20Innovation 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 0.20Management 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

External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted ScoreOpportunitiesGrowing health trends among consumers

0.08 3 0.24

Globalization, expansion in other countries (especially in China & India).

0.12 4 0.48

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Diversification and acquisition of other quick-service restaurants.

.04 3 0.12

Growth of the fast-food industry. .10 3 0.30

Worldwide deregulation .04 2 0.08

Low cost menu that will attract the customers. .08 2 0.16

Freebies and discounts. .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. .07 2 .14

Global recession and fluctuating foreign currencies.

.04 3 .12

Fast-food chain industry is expected to struggle to meet the expectations of the customers towards health and environmental issues.

.04 2 .08

Total 1.00 2.85

Financial Ratio Analysis 12/2007Growth Rates % McDonald's Industry S&P 500Sales (Qtr vs year ago qtr) -3.30 4.20 -3.80Net Income (YTD vs YTD) 84.70 47.90 8.40Net Income (Qtr vs year ago qtr) -22.60 -59.90 -94.80

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Sales (5-Year Annual Avg.) 6.53 8.14 13.26Net Income (5-Year Annual Avg.)

23.39 15.30 14.45

Dividends (5-Year Annual Avg.) 32.36 22.36 12.30Price RatiosCurrent P/E Ratio 14.7 14.2 13.0P/E Ratio 5-Year High N/A 9.5 12.5P/E Ratio 5-Year Low N/A 4.7 2.0Price/Sales Ratio 2.62 1.88 1.47Price/Book Value 4.62 3.54 3.00Price/Cash Flow Ratio 11.20 10.00 9.00Profit Margins %Gross Margin 36.7 32.1 39.4Pre-Tax Margin 26.2 17.2 13.2Net Profit Margin 18.3 12.0 9.15Yr Gross Margin (5-Year Avg.) 33.9 33.3 39.15Yr PreTax Margin (5-Year Avg.)

19.8 14.2 16.6

5Yr Net Profit Margin (5-Year Avg.)

13.7 9.8 11.45

Financial ConditionDebt/Equity Ratio 0.76 .80 1.03Current Ratio 1.4 1.2 1.4Quick Ratio 1.3 1.1 1.1Interest Coverage N/A 1.2 29.9Leverage Ratio 2.1 -5.3 1.9Book Value/Share 12.00 10.00 19.75Investment Returns %Return On Equity 32.2 44.4 27.9Return On Assets 14.9 11.3 8.1Return On Capital 17.0 13.7 11.2Return On Equity (5-Year Avg.) 19.7 22.8 20.6Return On Assets (5-Year Avg.) 10.0 8.98 8.5Return On Capital (5-Year Avg.) 11.4 11.0 11.5Management EfficiencyIncome/Employee 10,783 9,401 91,499Revenue/Employee 58,806 98,207 1,000,000Receivable Turnover 23.7 44.7 15.8Inventory Turnover 125.7 98.7 12.3Asset Turnover 0.8 1.1 1.0

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Net Worth Analysis 12/2007 (in millions)

1. Stockholders' Equity + Goodwill= 15,279.80+2,301.30 $17,581.102. Net income x 5 = 2395.10 x 5 $11,975.503. Share price = 58.91/EPS 2.02=$29.16 x 2,395.10 $69,849.184. Number of Shares Outstanding x Share price =

1,165x58.91$68,630.15

Method Average $42,009

Internal Audit

Strength Weakness

1. Strong brand name, image and

reputation.

2. Large market share.

1. Unhealthy food image.

2. High Staff Turnover including Top

management

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Date Avg P/E Price/ Sales Price/ Book

Net Profit Margin (%)

12/07 26.50 3.13 4.49 10.212/06 16.10 2.66 3.45 13.712/05 15.80 2.25 2.81 13.512/04 15.60 2.20 2.87 12.212/03 17.10 1.85 2.62 8.8

Date Book Value/ Share

Debt/ Equity

Return on Equity (%)

Return on Assets (%)

Interest Coverage

12/07 $13.11 0.61 15.3 7.9 9.512/06 $12.84 0.54 18.5 9.9 11.012/05 $11.99 0.67 17.0 8.6 11.012/04 $11.18 0.65 16.0 8.2 9.912/03 $9.50 0.81 12.6 5.8 7.3

3. Strong global presence.

4. Specialized training for managers known as the Hamburger University.

5. McDonalds Plan to win focuses on

people, products, place, price and

promotion.

6. Strong financial performance and

position.

7. Introduction of new products.8. Customer focus (centric).

9. Strong MCD's performance in the global marketplace.

3. Customer losses due to fierce

competition.

4. Legal actions related to health issues; use of trans fat & beef oil.

5. Uses HCFC-22 to make polystyrene that is contributing to ozone depletion.

6. Ignoring breakfast from the menu.

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted ScoreStrengthsStrong brand name, image and reputation.

0.12 4 0.48

Large market share. 0.10 4 0.40

Strong global presence. 0.04 3 0.12

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Specialized training for managers known as the Hamburger University.

0.04 3 0.12

McDonalds Plan to Win focuses on people, products, place, price and promotion

0.12 4 0.48

Strong financial performance and position.

0.08 4 0.32

Introduction of new products. 0.06 4 0.24Customer focus (centric). 0.06 4 0.24Strong performance in the global marketplace.

0.08 4 0.32

WeaknessesUnhealthy food image. 0.08 1 0.08High Staff Turnover including Top management

0.04 1 0.10

Customer losses due to fierce competition.

0.04 1 0.04

Legal actions related to health issues; use of trans fat & beef oil.

0.04 2 0.08

McDonald's uses HCFC-22 to make polystyrene that is contributing to ozone depletion.

0.04 2 0.08

Ignoring breakfast from the menu.

0.06 1 0.06

Total 1.00 3.16

SWOT MatrixStrengths Weaknesses

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1. Strong brand name, image and

reputation.

2. Large market share.

3. Strong global presence.

4. Specialized training for managers

known as the Hamburger

University.

5. McDonalds Plan to Win focuses on

people, products, place, price and

promotion.

6. Strong financial performance and

position.

7. Introduction of new products.

8. Customer focus (centric).

9. Strong performance in the global

marketplace.

1. Unhealthy food image.

2. High Staff Turnover including

Top management.

3. Customer losses due to fierce

competition.

4. Legal actions related to health

issues; use of trans fat & beef

oil.

5. Uses HCFC-22 to make

polystyrene that is

contributing to ozone

depletion.

6. Ignoring breakfast from the

menu.

Opportunities S-O Strategies W-O Strategies1. Growing health trends

among consumers.

8. Globalization, expansion in other countries (especially in China & India).

9. Diversification and acquisition of other quick-service restaurants.

10. Growth of the fast-food industry.

11. Worldwide deregulation.12. Low cost menu that will

attract the customers.13. Freebies and discounts.

1. Focus on Plan to win to attract customers and expansion in other countries (S5, O2, O6).2. Expansion in market share by more investments in Asia (S2, O2).

1. Minimize customers losses by provide low cost menu and discounts (W3, O6, O7).

Threats S-T Strategies W-T Strategies1. Health professionals and

consumer activists accuse 1. More control on franchise dealers

to maintain McDonald's reputation 1. Applying 0 grams Trans fat in

all worldwide McDonald's

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McDonald's of contributing to the country’s health issue of high cholesterol, heart attacks, diabetes, and obesity.

2. The relationship between corporate level McDonald's and its franchise dealers.

3. McDonald’s competitors threatened market share of the company both internationally and domestically.

4. Anti-American sentiments.5. Global recession and

fluctuating foreign currencies.

6. Fast-food chain industry is expected to struggle to meet the expectations of the customers towards health and environmental issues.

and quality (S1, T2). 2. Provide new product and keep

innovation (S7, T3).

(W1, W4, O1).2. Transfer from HCFC-22 to

HFC (hydrofluorocarbon)-free (W5, T6)

SPACE Matrix

Financial Strength Rating Environmental Stability Rating

Return on investment 4 Rate of inflation -3

Leverage 4 Demand Changes -3

Net Income 6 Price Elasticity of demand -1

EPS 5 Competitive pressure -3

ROE 5 Barriers to entry new markets -3

Cash Flow 4 Risk involved in business -2

Average 4.67 Average -2.5

    Y-axis 2.17

Competitive Advantage Rating Industry Strength Rating

Market share -1.00 Growth potential 5

Product Quality -1.00 Financial stability 5

Customer Loyalty -1.00 Ease of entry new markets 4

Control over other parties -2.00 Resources utilization 4

Profit potential 5

  Demand variability 3

 

Average -1.25 Average 4.33

    X-axis 3.08

Directional vector point is :( 3.08, 2.17)

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Grand Strategy Matrix

The Boston Consulting Group (BCG) Matrix

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Conservative Aggressive

CompetitiveDefensive

FS

ISCA

ES

Quadrant II Quadrant I

Quadrant IVQuadrant III

Rapid Market Growth

Strong Competitive

Position

WeakCompetitive

Position

Slow Market Growth

The Internal-External (IE) Matrix

Strong Average Weak 3.0 to 4.0 2.0 to 2.99 1.0 to 1.99

High3.0 to 3.99

Medium2.0 to2.99

Low1.0 to 1.99

The Quantitative Strategic Planning Matrix

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Question Marks

Cash Cows Dogs

Relative Market Share Position

IndustrySales

GrowthRate

Stars MCD

I III II

IV V VI

VII VIII IX

McDonald's

The IFE Total Weighted Score

The EFE Total

Weighted Score

(QSPM)

Strategy 1

Expand further in Asia by adding 500 restaurants

Strategy 2

Applying 0 grams Trans fat in all worldwide McDonald's restaurants

Key Internal Factors Weight AS TAS AS TAS

Strengths Strong brand name, image and reputation 0.12 4 0.48 4 0.48

Large market share 0.10 4 0.40 2 0.20

Strong global presence 0.04 4 0.12 2 0.08

Specialized training for managers known as the Hamburger University

0.04 - - - -

McDonalds Plan to Win focuses on people, products, place, price and promotion

0.12 4 0.48 4 0.48

Strong financial performance and position 0.08 4 0.32 4 0.32

Introduction of new products 0.06 - - - -

Customer focus (centric) 0.06 1 0.06 4 0.24

Strong performance in the global marketplace0.08 3 0.24 1 0.08

Weaknesses

Unhealthy food image 0.08 1 0.08 4 0.32High Staff Turnover including Top management

0.10 - - - -

Customer losses due to fierce competition 0.04 3 0.12 1 0.04Legal actions related to health issues; use of trans fat & beef oil

0.04 1 0.04 4 0.16

Uses HCFC-22 to make polystyrene that is contributing to ozone depletion

0.04 - - - -

SUBTOTAL 1.00 2.34 2.40

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Strategy 1

Expand further in Asia by adding 500 restaurants

Strategy 2

Applying 0 grams Trans fat in all worldwide McDonald's restaurants

Key External Factors Weight AS TAS AS TAS

OpportunitiesGrowing health trends among consumers 0.08 1 0.08 4 0.32

Globalization, expansion in other countries (especially in China & India)

0.12 4 0.48 1 0.12

Diversification and acquisition of other quick-service restaurants

0.04 - - - -

Growth of the fast-food industry 0.10 4 0.40 4 0.40

Worldwide deregulation 0.04 4 0.16 1 0.04

Low cost menu that will attract the customers 0.08 - - - -

Freebies and discounts 0.08 - - - -

Threats

Health 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 1 0.10 4 0.40

The relationship between corporate level McDonald's and its franchise dealers

0.09 4 0.36 1 0.09

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

0.12 4 0.48 4 0.48

Anti-American sentiments 0.07 - - - -Global recession and fluctuating foreign currencies 0.04 - - - -Fast-food chain industry is expected to struggle to meet the expectations of the customers towards health and environmental issues

0.04 1 0.04 4 0.16

SUBTOTAL 1.00 2.10 2.01SUM TOTAL ATTRACTIVENESS SCORE 4.44 4.41

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Recommendations

Expand further into Asia markets over a 2-year period by adding 500 restaurants per year at a cost of $4 billion annually, and applying 0 grams Trans fat in all worldwide McDonald's restaurants.

References1. www.mcdonalds.com 2. www.moneycentral.msn.com 3. www. mcdonalds .ca 4. Strategic Management concepts and cases by Fred David 12 edition5. Exploring Corporate Strategy text & cases 8th edition6. U.S. Environmental Protection Agency

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