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competitiveness? the franchisee. McDonald's Corporation provided a business
model to the entrepreneur and in return earned royalties
Company history
based upon the success of that formula. Kroc opened his
I
McDonald brothers4 first store in 1955 in suburban Chicago, and in 1961 bought
Brothers Mac and Dick McDonald opened their first restaurant the company for US$2.7 million. In 1985, when McDonald's
in California in 1940. It was built during the car-hop craze launched its initial public stock offering, Kroc's share of the
firm was valued at USS32 million.
I
and attracted a limited market of teenagers. Plagued with the
common problems of the car-hop business - labour-intensive
Marketing4,5
work, high turnover, waitresses dating customers, silverware
Early on, teenagers were McDonald's primary customers;
theft and grounds strewn with litter - the brothers decided to
however, Kroc's objective was to target the larger, more
try a new business approach: self-serve. Barbecue and other
profitable family market. Accordingly, promotions such as
items were removed to simplify the menu and eliminate the
59^1 Happy Meals were aimed at children so that they would appeal
p! need for silverware. An all male crew was hired, each of whom
to their parents to go to McDonald's. Newspaper ads featuring
was trained to perform a single task, which was enabled by
Rockwellesque paintings were provided by McDonald's
the new limited menu. It was in 1954 that the brothers' newly
Corporation to franchisees for use in their local media. The
designed operation caught the attention of Ray Kroc, who
Yellow Pages and newspaper ads were the most common
was to become the founder of McDonalds Corporation. Kroc
advertising medium in the 1950s, but these ads were ineffective
was selling multi-mixers used for mixing multiple shakes
in terms of reaching kids. Ronald McDonald was created and
at once. Because of the large volume each five-spindle unit
broadcast during children's shows when spots were cheaper.
could process, Kroc seldom had large sales. After selling 10
Creating this company 'spokesperson and using it during
separate machines to the McDonald brothers, he went to
children's shows flew in the face of convention during a time
San Bernardino to personally investigate the situation. He
when television advertising was never used by restaurants.
immediately saw the potential for expansion and negotiated to
This approach proved successful, though, and contributed
become the brothers' franchising agent.
to a rapid increase in sales of roughly 30 per cent. By 1985,
Ray Kroc4 McDonald's had the largest and most powerful promotional
The 1950s was an era marked by the rapid growth of budget of any brand.
franchises. Kroc's multi-mixer business had exposed him to The company was also considered a pioneer when it
sizeable franchises like Dairy Queen and Tastee Freeze. From advertised during the first Super Bowl. At the time, devoting
this experience, he concluded that die way for a corporation heavy expenditures to television advertising during the game
to make money was to ensure that its franchisees made was unproven; as such, it was also reasonably inexpensive. In
money. The widespread practice at the time was to charge 1967, it was estimated that 60 million viewers tuned in to the
considerable franchising fees, sell territory rights and require championship game and advertising cost about US$80000
store operators to purchase equipment and supplies from the for a 60-second spot. Super Bowl ads have since become a
corporation at cripplingly high margins. This caused many phenomenon and McDonald's 1993 Super Bowl ad, called
franchisees to cut corners to earn a profit, which hurt the The Showdown' and featuring Michael Jordan and Larry Bird,
reputation of other franchisees. Kroc saw this as detrimental is today regarded as one of the top Super Bowl ads of all time.
to the corporation overall. This conclusion became legendary
due to Kroc's perpetual insistence that every McDonald's McDonald's operations
store conform to die corporate tradition. He believed that Standardisation4
lack of orthodoxy would not only damage the brand image, One of McDonalds greatest concepts has been its strict
but would result in operational inefficiencies as well. He adherence to operating standards, known as QSC&V (quality,
created standardised menus, foolproof production processes, service, cleanliness and value). Because of standardisation,
470
CASE SEVEN McDONALD'S: FROM BIG MAC TO P'TIT PLAIS
customers initially were and today still are certain of the necessary mass volumes. A supplier determined how to obtain
experience they will receive, regardless of the McDonald's significant volumes of a single type of fish, and developed the
location they visit. Thus, a Big Mac is sure to be the same process to repeatedly create a consistent filet size and shape
in Chicago as in Cheyenne. Quality is reliable. Service is suitable for standardised cooking at all restaurant locations.
always fast and courteous. Stores and restrooms are clean As a result, company store managers were able to outsource
at every location. Uniformity has allowed for greater cost much of the labour to suppliers.
control through greater economies of scale that in turn allow
Menu 4A7
McDonald's to maintain low prices. Value is also maintained
The menu has traditionally been one of the most tightly
through price controls. Customers pay the same amount in
controlled aspects of McDonald's business operations. Too
each store they visit. QSC&V are consistent company-wide
many menu variations can create several problems including
to protect the brand image, so that no single franchisee can
disruptions in the supply chain, inconsistent quality, increased
damage the reputation of units located in other markets.
expenses due to inefficiencies, and uncertainty in consumers'
Supplier relationships4 minds. Pricing is also strictly restrained to manage demand
For McDonalds, supplier relationships are a key component and maintain fairness between franchisees. Table 1 (on the
in its efforts to control costs. To this end, the firm has next page) details major menu developments over the years.
traditionally maintained very strong relationships with a small
Global expansion4,8-9
handful of suppliers. Each supplier's processes are scrutinised
To continue growing and as a foundation for competitive
for compliance to McDonald's standardised procedures. For
success, McDonald's transported its business strategies to
example, each burger must weigh the same and have identical
other countries (see Table 2 for a timeline of McDonald's
proportions of beef to fat to facilitate die automated cooking
global expansions). To enter new markets, McDonalds utilised
process. Unique clamshell-style griddles were developed to
the formula that had proven so successful over the years. The
cook both sides at once and create a perfectly cooked burger in
strategy in entering foreign markets was 'one world, one taste'.
as little time as possible. A non-standard burger would either
In this regard, the firm was committed to the standardised
be under- or overcooked. The process is designed to be error-
formula that was the bedrock of its success. The goal was
free by eliminating variation. Suppliers with proven process
to offer US fast food at a reasonable price. 'One world, one
controls are rewarded with McDonald's exclusive business and
taste' was reinforced by the decision to begin expansion with
volumes that almost guarantee profits.
English-speaking countries that were more accepting of the
As a result, suppliers willingly share their expertise with the
USA. US businessmen and tourists frequented company
company Suppliers create unique process designs knowing their
restaurants for a familiar taste of home while overseas. The
efforts will be rewarded by the company In addition, they are
company was selling American culture.
confident their loyalty will be rewarded. The exclusive nature of
McDonald's top management believed that 'if we
the supplier relationship fosters a par mering of ideas. For example,
incorporate their food we lose our identity', but the company
a supplier solved the challenge of producing a consistent french
underestimated the impact of its restaurants on the cultures
fry McDonald's had experimented with various temperatures
of the host countries. This made the company vulnerable to
and cooking times but still experienced unpredictable results.
much resentment. The original American' appeal eventually
Inconsistency in the potato supply chain complicated matters.
wore off and concerns grew regarding fatty diets. Scares over
The pioneering supplier found a potato that could be obtained
bovine spongiform encephalopathy (BSE; known colloquially
year-round and then environmentally controlled the storage
as mad cow disease) and a growing anti-US sentiment
process to regulate the conversion of starch into sugar.
strengthened the negative image of McDonalds as a global
Although it was a franchisee who thought of the Filet-O-
'powerhouse' in terms of food. Attacks and protests directed at
Fish, a supplier found a way to successfully make the fillets.
the company increased.
Originally, fillets were sliced, battered and fried by hand in
Additionally, there were operational problems with
each restaurant. Availability issues led to the use of various
executing this standardised approach. The company was
types of fish, thus the fillet patties lacked uniformity The
growing and the infrastructure necessary to support the
filleting process was too lengthy and varied to replicate in the
restaurants was not in place. Careful scrutiny and supervision
PART FOUR CASE STUDIES
1981 McRib Off/on Barbecue sauce 1981, 1994 and 2005; farewell
tours 2006, 2007 and 2008; available 2011
1989 McPizza, lasagna and spaghetti Flop Attempts for supper; preparation took too long
1991 McLean Deluxe Flop 91% fat free; attempts at lean menu; dry
1996 Arch Deluxe Flop Attempts to appeal to adult tastes; loo distant
from McFamily tradition
2003 Dollar menu Current Key driver of sales and customer traffic
2004 Phase out supersize Current Simplify menu; support balanced choices
Source-. http://en.wikipedia.org/wiki7List_of_McDonald%27s_products.
had been the key to success, but many overseas operations Broadening global appeal610'1112131415
were joint ventures and difficult to supervise. Foreign In 2003, management adopted a strategy called 'Plan to
operations often did not have the qualified suppliers that were Win that shifted emphasis from increasing the number of
the key to standardisation. As a result, overseas locations were store locations to improving existing locations. Rather than
less profitable on average than their domestic counterparts. promoting what American customers expected, McDonald's
CASE SEVEN McDONALD'S: FROM BIG MAC TO P'TIT PLAISIR
1973 Sweden
1978 Belgium
1982 Malaysia
1983 Norway
1994 Botswana, Kuwait, New Caledonia, Oman, Egypt, Bulgaria, Bahrain, Latvia. United Arab
Emirates
1995 Estonia, Romania, Malta, Colombia, Slovakia, South Africa, Qatar, Honduras, Saint Martin
1996 Croatia. Samoa, Fiji Islands. Liechtenstein, Lithuania, Cyprus, India, Peru, Jordan, Paraguay,
Dominican Republic, French Polynesia, Belarus
1997 Ukraine, Yemen, Republic of Macedonia, Ecuador. Reunion, Isle of Man. Suriname
[Continued]
PART FOUR CASE STUDIES
2001 Mauritius
200A Montenegro
but expect to dine in, linger and have at least two courses. Scharfos (fried cottage cheese and jalapeno snack), El Pikanted
McDonalds prospered in France by positioning its restaurants (beef patty, pita and picante sauce) and a big bacon burger
as primarily takeaway, offering quality options without the topped with jalapenos. The popular Mexican food items were
time commitment. This strategy delivers a direct cost benefit tied to a promotion drat used Facebook and YouTube to allow
to the consumer; traditional restaurants are required to tax patrons to enter a sweepstakes.
patrons at a rate of 19.6 per cent, while McDonalds is only Russia 26.27,28.29.30.31
required to tax patrons 5.5 per cent. This makes inexpensive
After 14 years of negotiations that began at a meeting during
food even more reasonable in a sluggish economy with high
the Canadian Olympics, McDonalds was allowed to enter the
unemployment.
former Soviet Union market. Despite being a very challenging
Germany22,23'24-25 economy that prompted many other international businesses
Early on, McDonalds located its German restaurants on to leave, McDonald's did not retreat. Because there were
properties owned by German brewers to facilitate the few individuals with the resources necessary to become
selling of local beers. While this feature attracted a bar franchisees, one of the keys to McDonald's early success was
crowd, it deterred the families McDonalds preferred. Local participating in a 51 per cent joint venture with the Moscow
management understood the German market to be very price City Council.
sensitive so they increased beer prices and developed a coffee Historically, Russians had difficulty obtaining permission
bar. This later evolved into the concept known as McCafe. to leave the country Thus, patronising a US company in Russia
With die recent addition of more locations, McDonald's became a cheap and easy way to get a glimpse of the USA. In
has become the most popular restaurant brand to Germans addition, McDonald's was an attractive alternative to the poor
aged 12 to 18. This is due in part to the firms commercials service consumers were accustomed to, as quite often they had
starring Heidi Klura, a German supermodel. Her ads combat to stand in line for hours for food at other vendors. Fast food
the obesity image associated with McDonalds. In addition, had very little competition because restaurants for the average
stores are simply decorated and focus on the essentials typical citizen were rare. Most traditional restaurants were very fancy
of German design. Most stores feature televisions tuned to and exclusively targeted the rich. Remarkably, the fast-food
the McDonalds German Network, a very popular in-store diet was not an issue. Due to basic food scarcity, McDonald's
television network. It carries branding, entertainment, leisure instead got complaints chat the fat content in the mayonnaise
content and advertising. was not high enough. The menu in Russia was augmented
Germany is considered one of the most environmentally with simple foods unique to local tastes such as cabbage pie
conscious countries in the world. Sensitive to this, a typical and kvass (alcohol from fermented brown bread).
German McDonalds store converts used oil into biodiesel fuel, The average family income level in Russia also worked
buys solar-powered air conditioners and uses refrigerators that in McDonald's favour. While McDonalds was sometimes
operate without harmful chlorofluorocarbons. McDonald's criticised in the USA for low wages, Russians were very
also developed a prototype store that uses 25 per cent less happy with McDonald's jobs. Each new store opening created
energy. Staff patrol the grounds for garbage and the firm approximately 100 new jobs. Most families were poor and
displays anti-litter slogans on trash cans. To reduce waste, very few owned cars, so McDonald's did not need drive-thru
wrappers are made from 72 per cent recycled paper, while windows. Store owners instead developed walk-up windows.
other disposables such as tray liners, napkins and toilet paper In Russia there was little infrastructure and few
are made from 100 per cent recycled content. The firm even suppliers. Out of necessity, McDonald's chose to build
redesigned McFlurry lids to save, of all things, hedgehogs.55 their McComplex food processing facility while developing
McDonalds also improved its local sourcing in Germany. In a domestic supplier network. When McDonald's started
response to government pressure, McDonald's started adding in Russia, the state of affairs was in such infancy that, for
locally raised, organic beef to its patties. instance, there was not machinery available to mass harvest
McDonalds marketing executives also identified a German potatoes in the necessary volumes. Additionally, health and
fascination with Mexican culture and a love of that culture's safety standards lagged. After significant contriburions to the
spicy foods. Accordingly, McDonald's Germany added Los food service, processing, agriculture and business industries,
PART FOUR CASE STUDIES
today 80 per cent of supplies are sourced domestically It is experience the outside world to which China has only recently
estimated that die McDonalds supply chain network alone become open. In China, McDonald's food is expensive for the
created over 100000 new jobs in Russia. average citizen, so the firm's pricing is tiered by district based
Currency management was another new challenge to on the income of local consumers.
which McDonalds had to adapt. Rubles were not always The American experience offered by McDonald's is a
easily convertible, but McDonald's stores only accepted rubles, popular dining choice; therefore, the traditional Western-style
the local currency, to make it easy for the local public to spend menu is still the basis of McDonalds Chinese menu. Even so,
their money. Because of the difficulty in converting the rubles the Chinese menu does have some unique selections. In the
back to dollars and the difficulty obtaining loans, McDonalds Chinese culture, beef is associated with strength and energy,
strategy was to buy local real estate to spend the rubles, then so China is home to the 'Mega Mac' with four beef patties.
charge rent from those properties and collect in hard currency The new quarter pounder in China had cucumbers instead
This gave the company money to import the supplies it could of pickles. There are also inexpensive, traditional Chinese
not source locally The approach has paid off. McDonald's early choices on the menu such as a corn cup, a pork sandwich, and
real estate investments have appreciated about 40 per cent and seafood and vegetable soups.
land is now almost impossible to acquire today. Consequently, During traditional festivals, people tend to gravitate
as competitors attempted to enter the market, they were faced towards conventional Chinese restaurants. McDonald's hoped
with exorbitant rents. to reverse this tendency by celebrating Chinese national
holidays as well. Given this objective, the firm decorates stores
China32'33,34-35
with cultural emblems of Fu (happiness), magpies and twin-
The Chinese market was also challenging for McDonald's in
fishes symbols to recognise and show respect for Chinese
terms of real estate. McDonald's US site selection is calculated
traditions and culture.
down to a science and emphasises the suburbs because that
Food safety is a major issue for McDonald's in China.
is where most American families spend their time. Generally
McDonald's relies heavily on suppliers to minimise service
speaking, McDonald's found China's inner cities were less
time in the store, but safe food handling practices were not
deteriorated than US inner cities, and made them the primary
common. To remedy this, the firm held Chinese suppliers
target markets. McDonald's also decided that the best way to
to the same high standards as US suppliers and frequently
expand was to build groups of stores simultaneously, thereby
dropped in unannounced for inspections. McDonald's worked
achieving economies of scale in construction, sourcing,
hard to establish local supply chain networks in order to be
training and distribution. The firm secured locations in
less vulnerable to restrictive governmental trade policies.
growing areas that would become prime real estate in the
future. Similar to the experience in Russia, the firm took the Australia22'36'37'38-39'40'41'42
risk to buy low and have that presence when property prices McDonald's in Australia is often called 'Maccas'. McDonald's
started to appreciate. emphasises premium Angus beef and has positioned itself
In contrast to Russia, China was experiencing tremendous as a high-end fast-food outlet. They call this approach
economic growth; consequently, more and more Chinese were 'masstige' - prestige for the masses, premium but affordable.
driving cars. New drivers seemed to enjoy driving everywhere The beef McDonald's uses in Australia is 100 per cent Angus
possible. McDonald's was the first fast-food provider to offer a and locally sourced. Two of the more popular sandwich
drive-up lane in China, and the concept proved very popular. choices are the grand Angus and the mighty Angus. Quality
Trying to further take advantage of the growing car ownership is important and Australia's internationally recognised
in China, McDonald's closed a deal with the Chinese state- livestock identification system provides strong traceability
owned oil company allowing the company to open stores at and safety in terms of quality control. There has been such
its gas stations. a strong interest in healthy menu choices in Australia that
The Chinese tend to not dine out nearly as often as McDonald's has offered as many as 16 products on its 'light
Americans. However, when they do dine out, they are typically choice' menu, nine of which are approved by the Australian
not looking for their traditional cuisine, but something more National Heart Foundation. Even the french fries in Australia
novel. Going to McDonald's provides the opportunity to have been altered to adapt to local regulations and do not
CASE SEVEN McDONALD'S: FROM BIG MAC TO P'TIT PLAISIR
contain wheat or milk. McDonald's officials indicate that the include train stations and other busy sites with heavy traffic
firm worked for a full year to develop products in ways that throughout all hours of the day
would result in approval by the National Heart Foundation. Because of relatively fewer natural resources, the Japanese
Environmental concerns have been very important in have not required local sourcing as much as other countries.
Australia as well. McDonalds efforts in this area include Superior imports are considered acceptable. Thus, McDonald's
changing from foam to paper packaging, increasing the recycled has formed key partnerships to create viable supply chains.
content of paper products, comprehensive waste recovery For example, beef is not domestically produced but comes
and composting. The firm encourages suppliers to reduce from Australia.
their environmental impact as well. For example, all coffee is India48
certified sustainable by the Rainforest Alliance. A McDonald's
India is the worlds most populous democracy and the third-
team is working with the marine stewardship council on fish-
largest economy in Asia, just behind China and Japan. Given
fanning sustainability. Additionally, McDonalds has helped
this, it is no surprise that McDonalds was one of the first
its carton board supplier work supportively with the Forestry
American fast-food chains to enter the Indian market, with its
Stewardship Council.
first restaurant established in New Delhi in 1996. McDonalds
The company has exhibited a strong commitment to
franchises, while not as widespread as in other parts of Asia
employees in Australia. Casual employees have the same
and the Pacific Rim, are now found in many parts of India.
12-month parental leave as full-time employees. Wages are
In June 2009, the company announced expansion plans for
above the federal minimum. In 2001, McDonald's was voted
40 new restaurants across India, increasing the total number
the employer of choice for women and identified by Institute
of Indian locations to over 200. The current franchise growth
Australia as a 'Best Company to Work For' in 2008.
rate is higher in India than any other Asian country Entry is
Japan36'4W5'i6 typically accomplished through the use of joint ventures with
McDonalds has found the Japanese market to be challenging Indian firms.
and dynamic. The firm's early marketing strategy emphasised Initially, McDonald's experienced difficulty in India due
the appeal of US style products. This approach was successful to environmentalists and animal welfare activists. Religious
at first, but has recently experienced difficulties. McDonald's and anti-Western sentiment also presented challenges to
initially used a low-price strategy that was not well received the company Over 40 per cent of the Indian population is
in Japan. Although the market is very price sensitive, it is also vegetarian. Out of respect for the local religion and culture,
susceptible to fashion and trends. In response, promotions McDonald's serves no beef or pork products in India. Instead,
have been used to appeal to the younger generation. For McDonald's developed a special line of vegetable, fish and
example, various mega-burgers have been offered for a limited chicken sandwiches. The company developed both vegetarian
time only The company also used a creative and bold strategy and non-vegetarian menus with separate kitchens and service
to tout the future release of a 'top secret' sandwich. A select crews. McDonald's also offers kitchen and restaurant tours to
few high-profile stores were temporarily closed and re-opened assure customers the staffs are separate.
with the top-secret burger: the Big Mac, which was not Seventy-five per cent of the McDonald's menu is localised
available at other McDonald's restaurants in Japan. One of the for India. This represents a much larger portion of the total
few items unique to Japan to consistently remain on the menu menu than for other Asian countries. The Chicken Maharaja
is the teriyaki burger. Mac - two grilled chicken patties with smoke-flavoured
The company targets the youth market segment as having mayonnaise, cheddar cheese and vegetables - has become
the highest profit potential and, in so doing competes directly one of the most successful choices on the localised menu.
a Japanese convenience stores. The company also now The popularity of the chicken nuggets and sandwiches
naphasises coffee sales to leverage its large pricing advantage caused some restaurants to run out of supplies. The high
over Starbucks and appeal to price-sensitive consumers. demand for this sandwich has led the company to also offer
One of the keys to future growth is to eliminate the it in a lamb version. McDonald's continues to reach out to
competition by converting convenience store locations into local communities to improve its image. It has engaged in
McDonald's restaurants. Locations McDonald's has targeted partnerships with Indian communities to support schools,
477
PART FOUR CASE STUDIES
gardens and parks. The company has also made donations to secret that McDonalds can generate a great strain on the
the Bhuj, Gujarat and Latur earthquake relief efforts. infrastructure everywhere it operates. McDonald's began to
m turn provide both defence against criticism and support of citizens who register to participate in CO, emission reduction
the company brand. McDonalds has required beef suppliers programs.
to document that their cattle do not have BSE, and it has
Conclusion
asked its chicken suppliers to reduce antibiotic use.
As Skinner reflected on the past and how McDonald's had
Through a process called 'anticipatory issues management'
systematically used its standardised business practices to
the company identified a potential problem: the batteries
create a consistent customer experience, he realised how this
included with some Happy Meal toys contained mercury
aspect of McDonald's approach to business contributed to
The batteries never became a big public relations problem for
the success die firm enjoyed, including becoming the largest
McDonalds because the company proactively identified the
fast-food restaurant in the world. But the old McDonald's
risk and eliminated all mercury batteries from the toys.
existed in a stable world diat changed very slowly. CEO
Together with Unilever, Coca-Cola, the United National
Skinner now felt as though the world that his firm competed
Environment Program and Greenpeace, McDonald's created
in was changing daily, and in significant ways. McDonalds
a natural refrigerant program that explored alternatives to
current multi-domestic strategy, including its unique and
ozone-depleting chemicals. This program, called 'Refrigerants
customised approaches to each country, allowed it to respond
Naturally', won an Environmental Protection Agency award
more quickly to this dynamic environment. New socially
in 2005.
In 2009, the company developed an interactive software
responsible initiatives would help maintain the company's
reputation abroad. Still, Skinner knew he was going to have
program named EcoProgress that enables its restaurants to
to condnually rethink his strategy for company growth. In
reduce energy consumption by up to 11 per cent. McDonalds
this regard, a major question lingered, 'What is our next move
also pioneered improvements in water management through
going to be?' Skinner knew that these were challenging times
its stormwater retention tank program. The goals of this
and continual effort would be required for McDonald's to
rogram are to save on water use not only in the restaurants,
but in communities as well. Additionally, McDonald's has compete successfully throughout what was a rapidly changing
world and competitive environment. While the firm's recent
started programs for transforming its used cooking oil into
financial results were positive (see Table 3), continuing to
biodiesel fuels and has installed electric vehicle charging
perform in this manner would challenge the firm, its managers
tadons at restaurants in certain locations. The firm has also
-rtnered with the Japanese government to offer discounts to and employees.
(Cont/nued)
PART FOUR CASE STUDIES
Assets
Minority interest 0
Other liabilities, total 1,612.6 1,586.9 1,363.1
481