[SOLUTION] Closing Case Trouble at McDonald’s

Chapter Review

For most of its history, McDonald’s has been an extraordinarily successful enterprise. It began in 1955, when the legendary Ray Kroc decided to franchise the McDonald brothers’ fast-food concept. Since its inception, McDonald’s has grown into the largest restaurant chain in the world, with almost 37,000 stores in 120 countries.

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For decades, McDonald’s success was grounded in a simple formula: Give consumers value for money, good quick service, and consistent quality in a clean environment, and they will return time and time again. To deliver value for money and consistent quality, McDonald’s standardized the process of order taking, making food, and providing service. Standardized processes raised employee productivity while ensuring that customers had the same experience in all branches of the restaurant. McDonald’s also developed close ties with wholesalers and food producers, managing its supply chain to reduce costs. As it became larger, buying power enabled McDonald’s to realize economies of scale in purchasing and pass on cost savings to customers in the form of low-priced meals, which drove increased demand. There was also the ubiquity of McDonald’s; their restaurants could be found everywhere. This accessibility, coupled with the consistent experience and low prices, built brand loyalty.

The formula worked well until the early 2000s. By then, McDonald’s was under attack for contributing to obesity. Its low-priced, high-fat foods were dangerous, claimed critics. By 2002, sales were stagnating and profits were falling. It seemed that McDonald’s had lost its edge. The company responded with a number of steps. It scrapped its supersize menu and added healthier options such as salads and apple slices. Executives mined data to discover that people were eating more chicken and less beef. So McDonald’s added grilled chicken sandwiches, chicken wraps, Southern-style chicken sandwiches, and more recently, chicken for breakfast to their menu. Chicken sales doubled at McDonald’s between 2002 and 2008, and the company now buys more chicken than beef.

McDonald’s also shifted its emphasis on beverages. For decades, drinks were an afterthought, but executives couldn’t help but note the rapid growth of Starbucks. In 2006, McDonald’s decided to offer better coffee, including lattes. McDonald’s improved the quality of its coffee by purchasing high-quality beans, using better equipment, and filtering its water. The company did not lose sight of the need to keep costs low and service quick, however, and continues to add coffee-making machines that produce lattes and cappuccinos in 45 seconds, at the push of a button. Starbucks it is not, but for many people a latte from the McDonald’s drive-through window is comparable. Today, the latte machines have been installed in almost half of the stores in the United States.

All of these strategies seemed to work. Revenues, net profits and profitability all improved between 2002 and 2013. By 2014, however, McDonald’s was once more running into headwinds. Same-store sales declined in 2014, impacting profitability. Among the problems that analysts identified at McDonald’s was an inability to attract customers in the 19- to 30-year-old age group. Rivals offering healthier alternatives, such as Chipotle Mexican Grill, and “better burger” chains that appeal to this demographic, such as Smashburger, are gaining ground at the expense of McDonald’s. A recent Consumer Reports survey ranked McDonald’s burgers the worst among its peers. Another problem is that the quality of customer service at McDonald’s seems to have slipped. Many customers say that employees at McDonalds are rude and unprofessional. One reason why McDonald’s employees might be feeling stressed out is that the menu has grown quite large in recent years, and many restaurants are not longer staffed given the diversity of the menu.

In 2015, management at McDonald’s took steps to fix these problems. The company emphasized a number of “velocity growth accelerators” including

(1)

an “Experience of the Future” layout, which features a combination of ordering flexibility (including counter, kiosk, Web, and mobile ordering), customer experience (including a blend of front counter, table service, and curbside delivery), and a more streamlined menu (but one that still allows for personalization);

(2)

mobile ordering and payments; and

(3)

delivery alternatives.

The results of these initiatives have been promising, with McDonald’s starting to see faster growth and better profitability.

Sources: Jonathan Beer, “5 Reasons McDonald’s Has Indigestion,” CBS Money Watch, August 12, 2014; A. Martin, “McDonald’s, the Happiest Meal is Hot Profits,” New York Times, January 11, 2009; M. Vella, “A New Look for McDonald’s,” Business Week Online, December 4, 2008; M. Warner, “Salads or No, Cheap Burgers Revive McDonald’s,” New York Times, April 19, 2006. Virginia Chamlee, “The McDonald’s of the future has table service and touch screen ordering,” Eater, September 27, 2017.

Case Discussion Questions

What functional-level strategies has McDonald’s pursued to boost its efficiency?
What functional-level strategies has McDonald’s pursued to boost its customer responsiveness?
What does product quality mean for McDonald’s? What functional-level strategies has it pursued to boost its product quality?
How has innovation helped McDonald’s improve its efficiency, customer responsiveness, and product quality?
Do you think that McDonald’s has any rare and valuable resources? In what value creation activities are these resources located?
How sustainable is McDonald’s competitive position in the fast-food restaurant business?

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