McDonald’s: Polishing the Golden Arches
Case Analysis
by Amber Zirnhelt

© 2006 Amber Zirnhelt

Originally Submitted for Management 680: Corporate Strategic Planning and Policy
Professor Frank Shipper

POLICY AND FUNCTIONAL STRATEGIES

            McDonald’s has been an industry leader within the fast food industry for years.  In the introductory phase of their business operations they focused on following a generic low cost strategy consisting of offering consumers low priced food products in order to, “make eating out on a regular basis affordable for families…” (Marino 627).  Faced with changing consumer trends and competitors pursuing aggressive competitive strategies focused on product differentiation and quality; McDonald’s then CEO, Jim Cantalupo, determined in order to address the companies recent profit losses and challenges a different stand on generic strategy must be taken.  Through the implementation of McDonald’s Plan to Win strategy, Cantalupo shifted the company’s generic strategy to differentiation by focusing on marketing to turnaround the negative publicity recently experienced through offering customers a better overall fast food experience as compared to their competitors.

             McDonald’s financial strategy focused on decreasing capital expenditures by 40% while using their cash from 2003 operations to pay off debt and return cash to stockholders.  These financial strategies have allowed the company to implement the Plan to Win strategy while also improving stock performance and sales.  Through a growth strategy that involves renovating, rebuilding, and relocating buildings; McDonald’s hopes to create a, “fresh, sophisticated, but family-friendly atmosphere” (Marino 642).  However in order to sustain growth and success, additional investments may be needed in the future.

McDonald’s personnel strategy promotes their desire to market an exceptional customer experience.  Hospitality training and e-learning programs offer McDonald’s the most cost effective method of training for restaurant staffs, while ensuring employees are dedicated to customer service through the attitudes and skills they bring to the workplace.  This directly supports the managerial functional goal of creating a stimulating work environment.

Production strategies promote an overall quality experience by offering new products to customers in order to address growing changes in demand for healthier foods and premium products.  Technological improvements, including wireless hot spots, improves the relevancy of the overall quality experience McDonald’s is trying to market to consumers.  With these improvements in each functional area, McDonald’s marketing strategy aims to build trust and brand loyalty among current and future customers in order to gain significant competitive advantage in the marketplace.

Currently McDonald’s functional strategies are all successfully co-aligned with their new generic strategy of marketing differentiation focusing on quality customer experiences.  Although Jim Cantalupo is credited to McDonald’s improved performance only the future can tell if such strategies will provide McDonald’s with the core competencies needed to remain competitive in an overly saturated industry.  At which time McDonald’s functional strategies may need to be re-evaluated in order to maintain sustainable marketing differentiation.

FINANCIAL ANALYSIS (Appendix: Exhibits A-H)

Ratio Analysis (Appendix F):  With regards to liquidity McDonald’s is among the industry standard.  McDonald’s has a current ratio of 0.76 in year 2003 consistent with the industry.  This indicates that McDonald’s should increase their current assets in order to increase the likelihood that they will be able to meet current liabilities and cover short term debt.  Additional liquidity will provide McDonald’s a greater degree of financial flexibility, which will be necessary to continue with their current strategy.  According to past data this low ratio suggests that this is a typical trend experienced within the industry and this should not be a large concern for the company.  Concerning the acid test ratio again McDonald’s is among the industry average with an acid test ratio of .4937.  Among major competitors Sonic has one of the largest acid test ratios at .77.  

Regarding activity ratios, with respect to operating cycle, 2003 data indicates that McDonald’s is currently operating on a 21 day cycle compared to the industry average of 19 days.  This again shows that McDonald’s fares about average among their competitors.  According to the 5-Year Financial Summary (Appendix A) McDonald’s has improved their operating cycle in the last few years by slowly decreasing the number of days involved.  According to financial data, McDonald’s has maintained a relatively consistent fixed asset turnover in the last 5 years with a ratio of 0.9 in 2003 compared to an industry average of 1.5 casting a positive light on the company.

            Regarding leverage ratio’s McDonald’s is at a slight disadvantage to their competitors.  Their debt to total equity ratio in 2003 was 0.81 compared to an industry average of 0.58.  Although this is a relatively small incremental difference between the two ratios, McDonald’s should focus on lowering this ratio.  Times interest earned for McDonald’s are 4.8 while the industry operates at a 6.1 ratio.  This casts McDonald’s in a negative light indicating higher interest rates for the firm compared to competitors.  This can be attributed to the company’s high degree of leverage within the industry.

            Profitability ratios must also be considered when analyzing McDonald’s financial strength.  They have reported a return on assets ratio of 6.09, with the industry operating at a ratio of 7.90.  Although this indicates they are at a slight disadvantage compared to their competitors the 5-year financial summary indicates that they have significantly improved from 2002 when return on assets was only 4.27.  With regards to return on equity, McDonald’s operates on a 13.55 ratio while industry competitors operate on a 16.37 ratio.  This again shows that they are at a slight disadvantage compared to their competitors.  Ultimately after consideration of all of McDonald’s financials their profit margin in 2003 was reported as 8.80 with an industry reported ratio of 6.93.  When analyzing the profit margin of McDonald’s in past years this percentage increase shows that McDonald’s turnaround strategy implemented by Cantalupo is directing the company into the right direction.

Cost Analysis (Appendix G):  Analysis suggests that McDonald’s needs improvement in cost control.  Their depreciation and extraordinary expenses rank below average compared to competitors; indicating cost financial areas McDonald’s must address in order to remain competitive within the industry.  As a result of their better than average selling, general, and administrative costs this helps improve their overall cost situation.  Interest and cost of goods sold are among average in the industry however they are located on the low end of the spectrum.  This again indicates areas of improvement with regards to cost management by the company.  Although many of the costs were incurred during Greenberg’s tenure as CEO financials show cost control improvement.  Despite their below average ratings an unweighted trend of 0.4 and a weighted trend of 0.02 suggest that among all cost ratios McDonald’s is on the road to improvement.

STRENTHS AND WEAKNESSES

Strengths: According to the Company Capability Profile (Appendix I,J) McDonald’s greatest strength can be found in competitively taking advantage of market growth.  McDonald’s has had one of the strongest international presences among fast food competitors.  McDonald’s has successfully integrated local eating trends and traditions worldwide by varying local menus in different regions of the world.  Although all fast food chains have experienced consistent expansion overseas, McDonalds has had the strongest presence since the beginning.  As the domestic market began experiencing over-saturation, more than half of McDonald’s locations were located throughout the world.  This increased McDonald’s competitive edge over other fast food chains with industry predictions stating that international countries may be the only source of growth for the fast food industry in future years.  This market growth attributes to another competitive strength found in McDonalds which is market share.  Although McDonald’s market share has been somewhat declining in recent years, the company announced system wide sales of $20,305.7 million in 2003.  Among the largest chains in the restaurant industry Burger King ranked number two with only $8,350.0 million in sales demonstrating the significant sales differential among McDonald’s and their competitors.

Although managerial factor scores indicate a weak managerial functional area relative to the industry, CEO Jim Cantalupo can be characterized as a balanced leader (Appendix K).  Cantalupo is largely credited for his Plan to Win turnaround strategy which helped McDonalds achieve, “double-digit percentage sales gains” (Bhatnagar).  As a result of Cantalupo’s success much of the negative managerial blame can be placed on management initiatives taken prior to his post-retirement tenure.

Weaknesses: Prior to the return of Cantalupo, Jack Greenberg served as CEO.  Much of McDonald’s poor performance in 2002 can be attributed to Greenburg’s strategic direction.  Although he had many ideas that focused on improving customer service rankings many business analysts criticize Greenberg in that he “launched too many initiatives simultaneously and had failed to properly implement any of them” (Marino 630).  Such traits indicate that Greenberg can be described as a Novice leader (Appendix K).  McDonald’s focused too heavily on increased expansion and diversification to new food segments within the industry.  This weakened McDonald’s while draining them of financial resources.  Product innovations developed included the, “Made for You,” cooking system costing the corporation $420 million, while franchisees were forced to invest between $18,000 and $100,000 in kitchen upgrades.  Such a financial investment led to additional problems between McDonald’s and their franchisees, a relationship that was on shaky grounds to begin with.  These unsuccessful initiatives put McDonald’s at an extreme disadvantage to their competitors; many of who gained competitive advantage while McDonald’s remained slow to respond to changing market conditions.  This lack of proper strategic planning implemented during Greenberg’s tenure has resulted in the lowest performance ranking in the fast food industry based on such factors as poor customer service, extremely high employee turnover, and slow order processing time.  Such factors hindered McDonald’s and forced them to play catch up in an already overly saturated market.  Such poor rankings can ultimately jeopardize the firm’s new strategy of market differentiation in the future by forever casting a negative light on the company.

ENVIRONMENTAL ANALYSIS

            The fast food industry is a mature, but highly competitive industry.  As a result the industry is dominated by a few major restaurants including: Burger King Corporation, Wendy’s International, Inc., CKE Restaurants, Jack in the Box, and Sonic.  These fast food chains must rely on their strengths to take advantage of opportunities present in the industry while overcoming their weaknesses and avoiding their threats.

            Opportunities:  Utilizing an environmental threat and opportunity profile (ETOP); demonstrates that McDonald’s has the greatest chance of opportunity concerning geographic and technological environmental forces (Appendix L).  Industry predictions indicate that much of the future growth present in the fast food industry will come from overseas expansion.  Success will come first to those companies who are able to market themselves successfully within international geographic environments.  This opportunity successfully aligns with McDonald’s current competitive strength with regards to international market growth.

            In this mature industry market differentiation can be enhanced through quality improvements and innovations.  The ETOP profile indicates that technological advancements can bring such success to McDonald’s.  By providing wireless internet services in restaurants across the globe McDonald’s is adding value to the desired customer experience they are attempting to elicit.

            Threats:  Overwhelmingly social forces are the largest threat to McDonald’s.  Consumer preferences are now geared more towards healthier food alternatives and McDonald’s has traditionally had a negative image in regards to providing health benefits to consumers.  Although McDonald’s is attempting to overcome such an environmental threat, they are an easy target for negative publicity.  McDonald’s has been the industry leader for decades so naturally they become the first targeted.  The many competitors now present in the industry often serve as an environment threat to the fast food chain.  Major fast food restaurants such as Burger King and Wendy’s have been more successful than McDonald’s in addressing current consumer health trends.  Wendy’s has successfully adapted to this change in lifestyle with the introduction of their gourmet salad line.  Typically 30% of those consumers visiting Wendy’s do so specifically for the purpose of purchasing salads from their Garden Sensations salad line (Marino 632).  Although McDonald’s is now offering more products to such health conscious consumers, new sandwich chains such as Subway will serve as an alternative to the typical “greasy” fast food hamburger chains.  As a result McDonald’s must also take such competitors seriously.

SOLUTIONS AND RECOMMENDATIONS

            The SPACE analysis (Appendix M) recommends that McDonald’s pursue an aggressive strategic direction in order to further increase their initial increase in sales and profits after the implementation of Cantalupo’s turnaround strategy. 

            Action Plan Short Term:  It is essential for McDonald’s to address promotional issues relating to their desire for quality.  New promotions must be developed if McDonald’s hopes to regain the trust and loyalty that was shattered by their negative image.  Promotions should demonstrate McDonald’s willingness to respond to consumer desires while focusing on social responsibility issues that have plagued the company with negativity publicity including health related problems such as obesity.  Continue with cost reduction to continue paying off prior debt obligations while increasing shareholder wealth.

            Long Term:  In order to remain competitive in an overly saturated mature industry, McDonald’s should continue to increase international expansion efforts.  Industry analysis predicts that one of the few sources of growth for fast food chains lies in international operations.  International expansion efforts currently serve as one of McDonald’s core competencies and as a result they should enhance their strategic presence in the marketplace by enhancing this capability.  The domestic market is already overly saturated and in order to decrease the risk of cannibalizing existing franchisees McDonald’s should seek to expand in those countries where they have minimal market presence.  Following a concentric diversification strategy is another long term plan the company should implement.  Such diversification allows a company to offer products or services within different SIC codes, but remain relatively similar to the present product line.  To address changing consumer preferences McDonald’s should offer more foods geared towards healthier consumer eating trends, while also offering more premium products to follow their desire for marketing a quality customer experience.  To guarantee service focused on quality customer experiences hire only those managers and employees who demonstrate understanding of the importance of following and supporting McDonald’s future strategic direction.

 

Works Cited

Bhatnagar, Parija. “Sad Day at McDonald’s.” CNN Money. 19 April 2004.

            http://money.cnn.com/2004/04/19/news/fortune500/mcdonalds_ceo/

Marino, Lou & Jackson, Katy Beth. “McDonald’s: Polishing the Golden Arches.” Crafting and Executing Strategy, Concepts and Cases. 14/e.

McDonald’s Restaurants Official Web Site. www.mcdonalds.com

Research Insight.

Shipper, Frank. Strategic Management Workbook.

 

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