McDonald's Case WAC

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Lahore School of Economics
Date: 20
th
September, 2014

Submitted by:
Mirza Adeel Baig
Naveed Akbar
Qasim Nasir
Ammar Saeed
Arslan Sarwar

Program: EMBA

Section: A

WAC Number: II

McDonald’s Corporation


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Case Summary:

The case is about the problems being faced by McDonald’s corporation which results decline in
growth from year 1990 to 1991, McDonald was renowned due to its traditional operating system
to deliver the fast, quality product to their customers which they call as QSC quality, service and
cleanliness and it had enjoyed enormous growth in their customer base and market share in last
many years based on these perimeters. Their tremendous revolutionized supply chain is also one
of the key competencies for the McDonalds which ultimately resulted in their growth.
In 1991 management sales volume has been dropped which cause their management and CEO
Ray Kroc to think over their strategy and to evaluate the changing trends in the fast food sector,
since last couple of year customers of USA market are becoming health conscious and their
priority has been changing towards the dietary food and McDonalds food products are not
considers health food due to which their management has to think over and need to add
environmental factors in their strategy, along with this McDonald was in fierce competition with
the food chains providing variety of products with discounted prices to the customers but
McDonalds key strength is their limited menu, so their management needs to decide either go
with their conventional menu and operational structure or should they go for versatile menu
creating to cater the change keeping in view the fact that it may affect their core competency and
they will be no more be qualified as quality service providers with uniformity worldwide.









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Introduction:

McDonald’s roots go back to the early 1940s when two brothers opened a burger restaurant that
relied on standardized preparation to maintain quality—the Speedy Service System.

So impressed was Ray Kroc with the brothers’ approach that he became their national franchise
agent, relying on the company’s proven operating system to maintain quality and consistency.

Over the next few decades, McDonald’s used controlled experimentation to maintain the
McDonald’s experience, all the while expanding the menu to appeal to a broader range of
consumers. For example, in June 1976, McDonald’s introduced a breakfast menu as a way to
more fully utilize the physical plant. In 1980, the company rolled out Chicken McNuggets.

Despite these innovations, McDonald’s tremendous growth could only continue for so long.
McDonald’s faced heightening competition on several fronts. First, its traditional rivals—Burger
King, Wendy’s, and Taco Bell—were eating into its margins through promotions and value
pricing strategies. Taking a leaf from McDonald’s own playbook, Sonic and Rally’s were using a
very limited menu approach to attract time-strapped consumers. Finally, Chili’s and Olive
Garden were appealing to diners looking for something a little more enticing than the familiar
Golden Arches for their families (McDonald, 2014).

In the late 1980s, McDonald’s began recognizing the importance of maintaining an ecologically
correct posture with the public, which was becoming more concerned about the environment.
Closer to home, a 1990 study showed that each McDonald’s generated 238 pounds of on-premise
solid waste per day.

Together, EDF and McDonald’s considered its impact on a wide range of stakeholders—
customers, suppliers, franchisees, and the environment. The company gave its franchisees much
autonomy in finding ways to eliminate environmental blight. The company’s hope was that from
these divergent approaches, it stood a greater chance of finding solutions with broad applicability
than if it had tried to pursue a one-size-fits-all approach from the outset.

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While these competitive wars were being fought, McDonald’s was gathering flak from
environmentalists who decried all the litter and solid waste its restaurants generated each day. To
counter some of the criticism, McDonald’s partnered with the Environmental Defense Fund
(EDF) to explore new ways to make its operations friendlier to the environment (McDonald,
2014).

Problems:
McDonald’s had generated an average annual return on equity of 25.2% from 1965 through
1991 and an average annual earnings growth of 24.1%. However enjoying tremendous growth
for 35 years, sales per unit had slowed between 1990 and 1991. Its market share in US, dropped
from 18.7% in 1985 to 16.6% in 1991 thus raising concerns for the management. It was facing
the falling growth and the revenues domestically. They were to deal with this main problem
while other problems were identified in the same circumstances which were short term and long
term. The competition, environmental challenges, limited menu were all part of the problems
faced by McDonald’s.
Long term problems:
Environment concerns
Growing concern for environment among consumers had affected the sales. A study showed that
53% of participants had declined to buy a product because they were worried about the effects
the product or its packaging might have on the environment.
McDonald’s was perceived by some as an environmental demon because all its products were
served in disposable containers.



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Short term problems:
Competitive challenge
In addition to traditional rivals like Burger King, Wendy’s or KFC, entry of specialist
competitors who emulated McDonald’s strategy to capture segments of the market. This has
made the competition much tougher.
After reviewing the causes of the core problem, the path of addressing these causes seems
pretty clear, however it is not as easy as it looks. To address these problems and ultimately solve
the core problem, McDonald’s needed to revisit its strategy.
McDonald’s success is attributed to its legendary operating system, which is designed to ensure
consistency and uniformity across all outlets.
The reduced growth in the US market was the symptom caused by limited menu, change in the
demographic trends, environmental concerns and increased market competition.
The decision faced by the manager was:
1) Should the company slowly change or should it be a dramatic change which support the
company’s volume growth objective.
2) To what extent would environmental concerns compromise McDonalds traditional strengths
and complicate an already challenging competitive situation.
3) The recent collaboration with the EDF help McDonald’s as it sought solutions to the
continuing competitive situation.

Causes of the Problem
McDonald’s, quick service restaurants worldwide, had distinguished itself through its remarkable
consistency across all units. The Golden arches—the corporate emblem symbolizes pleasant, fast
service and tasty inexpensive food.

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McDonald’s success is attributed to its legendary operating system, which is designed to ensure
consistency and uniformity across all outlets. McDonald’s operating system concentrated on four
areas: Improving product; developing outstanding supplier relationships; improving equipment
and training and monitoring the franchises.
Core Problem
McDonald’s had generated an average annual return on equity of 25.2% from 1965 through
1991 and an average annual earnings growth of 24.1%. However enjoying tremendous growth
for 35 years, sales per unit had slowed between 1990 and 1991. Its market share in US, dropped
from 18.7% in 1985 to 16.6% in 1991 thus raising concerns for the management.
Causes of the problem
Analysis of the problem of falling growth rate pointed out following factors.
Limited menu options
McDonald’s had achieved success by focusing on a simple formula: limited menu, low price and
fast service. However with changing demography, growing competition and new customer
desires, this limited menu has now appeared to be a limiting factor.
At lunch and breakfast, customers are more concerned with speed and convenience but for
dinner customers expect full meal and complex service. Only 20% of McDonald’s sales come
from dinner. To entice customers for dinner required new menu.
Offering variety of foods could disrupt the operating system built around a limited menu. This
may compromise consistency of food. The number of additional products could also detract from
the speed of service. In addition increasing variety, poses pricing challenges from competitors.
Changing Demography of customers
Change of demography in US, with more than 20 million people between ages of 40 and 60
years, has lead to growing trend of going to casual dining restaurants.

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In addition there is an increasing, yet variable concern for healthy food. Hamburger consumption
had dropped from 19% of all restaurant orders in 1982 to 17% in 1990. Consumers are becoming
more conscious of nutrition and dietary options without compromising taste.
To address concern about nutrition McDonald’s introduced 91% fat free burger, Mclean.
Environment concerns
Growing concern for environment among consumers had affected the sales. A study showed that
53% of participants had declined to buy a product because they were worried about the effects
the product or its packaging might have on the environment.
McDonald’s was perceived by some as an environmental demon because all its products were
served in disposable containers.
McDonald’s has accepted Environment Defense Funds’ (EDF) suggestions in reducing the solid
waste. 80% of the chain’s solid waste was produced behind the counters. 42-steps waste
reduction plan included, introduction of reusable shipping containers, and other materials,
substantial packaging changes, new and expanded recycling efforts thus cutting the waste stream
by 80%.
Competitive challenge
In addition to traditional rivals like Burger King, Wendy’s or KFC, entry of specialist
competitors who emulated McDonald’s strategy to capture segments of the market. This has
made the competition much tougher.
Two hamburger chains, Sonic and Rally’s offered drive through service only and specialized in
delivering fast. In 1991 Sonic sales per unit increased to 13%.
Taco Bell featured Mexican food with more than 26 items on the menu priced less than one
dollar. Like McDonald’s, Taco Bell shifted food preparation to outside suppliers, reduced
kitchen space at outlets and the prices were kept low. During 1988 to 1991 Taco Bell served
60% more customers and their sales increased to 63%.

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After reviewing the causes of the core problem, the path of addressing these causes seems pretty
clear, however it is not as easy as it looks. To address these causes and ultimately solve the core
problem, McDonald’s needed to revisit its strategy. McDonald’s was one of the best companies
with respect to customer perspective of its strategy, by focusing on operational excellence
(Jacobs). Its processes were designed marvelously as its cycle time was less, its productivity was
high. In order to address the above mentioned causes of the core problem the company needed to
add variety in its menu and therefore move away from its strategy of keeping its menu limited.
Such a move posed a threat to its existing operations strategy which ensured existence of its
competitive advantage through the speed, volume, quality, consistency and uniformity of its
product and service.
Decision Criteria:
McDonald’s, the long-time leader in the fast-food wars, faced a crossroads in the early 1990s.
Domestically, sales and revenues were flattening as competitors encroached on its domain. In
addition to its traditional rivals such as Burger King, Wendy’s, and Taco Bell, the firm
encountered new challenges. Sonic and Rally were competed using a back-to-basics approach of
quickly serving up burgers, just burgers, for time-pressed consumers. On the higher end, Olive
Garden and Chili’s had become potent competitors in the quick service field, taking dollars away
from McDonald’s, which was firmly entrenched in the fast-food arena and hadn’t done anything
with its dinner menus to accommodate families looking for a more upscale dining experience.

While these competitive wars were being fought, McDonald’s was gathering flak from
environmentalists who decried all the litter and solid waste its restaurants generated each day. To
counter some of the criticism, McDonald’s partnered with the Environmental Defense Fund
(EDF) to explore new ways to make its operations more friendly to the environment (Fund,
2014).
Alternative Solutions

Alternative -1:

Looking at the case facts one alternative could be to diversify its menu by addition of new
product lines to cater the wider food market, like introduction of Pizza and other food items. It

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would help McDonalds to cover the larger market but on the other end McDonalds would losses
its core competence of delivering food with consistency, uniformity and speed while keeping
quality, service and volume business intact.

The secret of McDonald’s success is its willingness to innovate, even while striving to achieve
consistency in the operation of its many outlets. For example, its breakfast menu, salads, Chicken
McNuggets, and the McLean Deluxe sandwich were all examples of how the company tried to
appeal to a wider range of consumers.

The company has also made convenience its watchword, not only through how fast it serves
customers, but also in the location of its outlets. Freestanding restaurants are positioned so that
you are never more than a few minutes away by foot in the city or by car in the suburbs. Plus
McDonald’s is tucking restaurants into schools, stores, and more.

Alternative-2

McDonald’s had done well with a fairly limited product range. But falling per unit sales is a
danger sign for the firm. With competitors gaining ground on McDonald’s, it may indicate a
need to refresh its product line. Perhaps the best way to do that is by rotating in a couple highly
promoted new menu items preferably healthier products. This would have the effect of
enlivening the product menu, without the need to go head to head with competitors on price.

To maintain consistency in new products as it expands the product line, McDonald’s must rely
on test marketing new menu items in pilot locations. This approach will let the firm identify
which items are likely to prove popular with consumers while ensuring that the company can
deliver new products with consistent quality nationwide. McDonald’s already has a history of
doing this so it will not require major changes to its operations strategy—at least initially. If the
product line-up gets too large, then the task of maintaining quality becomes exponentially harder.
The trick is to consider how to eliminate some of the existing menu items when you introduce
new ones, while making sure the staff is fully trained in how to execute these products
successfully.
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Decision/Conclusion

McDonald’s faces some difficult challenges. Key to its future success will be maintaining its
core strengths—an unwavering focus on quality and consistency—while carefully experimenting
with new options. These innovative initiatives could include launching higher-end restaurants
under new brands that wouldn’t be saddled with McDonald’s fast-food image as a contingency
plan. The company could also look into expanding more aggressively abroad where the prospects
for significant growth are greater.

The company’s environment efforts, while important, should not overshadow its marketing
initiatives, which are what the company is all about.

Recommended Plan of action:
After the identification of the alternatives available to McDonald’s CEO Ray Kroc we would
recommend that McDonalds should go for restricted menu in term of number of food items as
this is the main reason to create core competence of McDonald which are uniformity and the
consistence of their product quality, services and cleanliness (QSC) in addition to the value been
provided to their supplier and customers around the world.
It will also help to strengthen the McDonald’s legendary operating system which is based on four
major points as:
 Improvement in the product.
 Developing outstanding supplier relationship and franchisers
 Training and development of their staff
 Improving equipment efficiency
Their operating system will only be intact if they will keep their menu standardized and
restricted as they cannot achieve this level of excellence with the extended menu as they have
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mentioned in the case that the success of their operating system was not because they are
smarter, the fact is that they are selling just ten items.
Solution and implementation:
The solution of the problem that Ray Kroc and McDonald’s management was facing about the
change in operations strategy to accommodate the growing need for flexibility and variety in
products will be to identify their product in which their sales was declining and to replace that
item with a new item in the menu this way they could keep their control on the product
operations and number of item in the menu will be the same meaning change in term of product
replacement item wise and not the entire menu.
Furthermore to cater the issue of environment, McDonald is already doing their work in the area
by introducing environmental friendly packaging, McLean fat free burger with 90% fat free
contents so McDonald need to innovate with the help of their suppliers in the area of
environmental and health safety products but again this should be the replacement of some low
business generating item in the menu.
To judge the needs of the customer McDonalds in relation to their product specifications they
can use house of quality model in which they we can relate the customer needs like:
 Environmental friendly packaging
 Fat free contents
 Faster delivery
 Low price
With the product specifications and once they will find out the specific requirement and product
related variable they work with their vendors to improve their product standards accordingly.
Contingency plan of action:
As a contingency plan of action McDonald should add dinner menu in which they can introduce
a new product line which will only be available in the dinner menu as for McDonalds their major
sales share has been generated from breakfast and lunch menu in dinner menu people do not
wanted to eat heavy food as for the health conscious people it a famous saying that “Have
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breakfast like a king, Lunch like a prince and dinner like a miser” so their fat free burgers and
healthy food item could be available in their dinner menu plus it will also create curiousness
among their customer to taste the change in their menu in the dinner and this should only be
implemented in the USA region, as in overseas market McDonald was still making growth.
But McDonalds should not disturb their core competency element of uniformity and consistency
as without this McDonalds will be nowhere because of the reason that competition in the market
is very tough its competitor was already providing variety in the food menu with discounts to
their customers what they are lacking is the uniformity in their food menu a customer will not be
sure about the taste and quality of the product other than McDonalds in the different regions.
McDonald’s has pretty well saturated the U.S. market, it’s only real opportunities for growth lie
abroad, where the competition is not so cutthroat or by introducing new restaurant concepts
under brands other than McDonald’s. After all, McDonald’s is known for fast food. It’s not
really a pleasant dining experience, just a cheap and convenient one. I feel that McDonald’s has
reached the point of diminishing returns with the McDonald’s brand and now needs to roll out
new types of restaurants (McDonald, 2014).
Model and theories to suppose recommended plan of action:
As per Kaplan and Norton’s Balance score card model customer value proposition is based on
three major components:
 Increase customer value by
o Price
o Quality
o Time
o Functionality
 Relationship
 Brand Image
McDonalds is best examples which are fulfilling all these criteria’s in the best way because of
their excellent operational system and the core reason of this system is the limited number of
item in their menu so keeping the number of items in the menu will help McDonalds to stick to
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their core competency change could be in their items one item will be out from menu and other
will be added (Chase Jacobs, 2004).
If McDonald would diversify its menu it will certainly losses speedy service, price will also be
affected because for McDonalds volume would main factor their get the margin on sales.


Bibliography

Chase Jacobs, A. (2004). Operations Management. The McGraw-Hill Companies, Inc.
Corbett, M. F. (2004). The Outsourcing Revaluation. Dearborn: getAbstract compressed knowledge.
Fund, E. D. (2014). edf.org. Retrieved from http://www.edf.org/
McDonald. (2014). McDonald official web site. Retrieved from mcdonalds.com.pk:
http://www.mcdonalds.com.pk/