McDonalds Strategic Audit

Strategic Audit

McDonald’s

Executive Summary

 When a person thinks about fast food, often, the first name that comes to mind is McDonald’s.  McDonald’s has been a company since Ray Kroc purchased a hamburger franchise from the McDonald brothers back in 1961 for $2.7 million (History:McDonald’s, 2019). Kroc knew how to grow a business, quickly taking McDonald’s international in 1967 and becoming a household name.  In fact, in today’s world, Ronald McDonald and the Golden Arches of McDonald’s are more recognizable than the Christian Cross, with a 96% identification rate amongst children, only second to Santa Clause (Fast Food Nation, 2011).  This kind of brand recognition has enabled McDonald’s to not only be the top fast food company in the food business, but a leading company in the business world.

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 McDonald’s company values, objectives and strategies are being tested in today’s market.  While striving to best serve their customers quality service and food, the demands of today’s society are requiring large changes to the business.  These values that McDonald’s puts forth are broad enough to capture these sorts of changes while still laying out a general plan for the way they will deal with these issues.  They have even taken things a step further and outlined on their own site how they strive to work with current trends of conservation and modernization.  These values hold true for the company not only domestically, but also on a global scale.  The commitment to customer service and quality food is as equally strong on the global level.  McDonald’s continues to reassure their commitment to customers, investors and employees equally.

1. History and Background Information

• 1948 – Dick and Mac McDonald open their drive-in restaurant chain, Speedy Service System.
• 1954 – Ray Kroc becomes McDonald brothers franchising agent
• 1954 – McDonald’s top competitor in the burger market, Burger King, opens
• 1955 – Ray Kroc opens first McDonald’s in Des Plaines Illinois, setting up the McDonald’s System Inc, predecessor of today’s McDonald’s Corp.
• 1958 – First McDonald’s on the East Coast opens in Hamden Connecticut
• 1958 – McDonald’s reaches 100 million burgers sold
• 1961 – Ray Kroc purchases the restaurant chain from the McDonald brothers for $2.7 million
• 1962 – The first McDonald’s that has seating is opened in Denver Colorado
• 1963 – Globally recognized mascot Ronald McDonald was created by Willard Scott
• 1963 – McDonald’s reaches 500 restaurants and over 1 billion burgers sold.
• 1967 – McDonald’s goes international, opening in British Columbia
• 1968 – McDonald’s introduces their signature sandwich, the Big Mac
• 1969 – The Wendy’s chain is started in Columbus Ohio
• 1971 – McDonald’s becomes a global chain, opening restaurants in Tokyo, Amsterdam, Munich and Sydney
• 1975 – The first drive thru is introduced in Arizona
• 1979 – The first kid’s meal option, the Happy Meal, is introduced
• 1984 – The death of Ray Kroc
• 2000 – McDonald’s is the main target of the book Fast Food Nation
• 2002 – McDonald’s first quarterly loss is reported, a loss of $344 million
• 2003 – McDonald’s launches their new slogan, “I’m Loving It”
• 2004 – McDonald’s removes their Super Size option, citing the movie “Supersize Me”
• 2006 – Nutritional Information is made public for their menu offerings
• 2010 – Subway passes McDonald’s as the largest global fast food chain
• 2015 – As sales struggle, Steve Easterbrook is announced as CEO
• 2015 – McDonald’s launches all day breakfast
• 2018 – McDonald’s announces a ban on plastic drinking straws in its European locations

2. Current Situation

1. Current Performance

 While McDonald’s has been a leading company for many years, it has seen a decline in some of the most recent years.  In 2011 Subway passed McDonald’s for the most worldwide locations (Jargon, 2011).  Casual fast dining restaurants like Five Guys, Shake Shack, In and Out Burger, Chipotle, Panera and Qdoba seem to strike a chord with the current generation that makes up a large segment of consumers, Millennials.  In fact, McDonald’s went from a 50% market share of fast food burger restaurants in 2010 to only 17% in 2016 (Dess, McNamara, Lee, Eisner, 2019). 

One telling statistic is how the company has steadily decreased in revenue over the past three years, going from $27.4 billion in 2014 to only $24.6 billion in 2016.  This can lead to two conclusions, either McDonald’s is starting to fall in their business strategy or other companies are catching up.  Another telling statistic is the fact that the Big Mac, considered the flagship sandwich of McDonald’s, has only been tried by 20% of Millennials.  The restaurant had its first ever quarterly loss in 2002 which led to stocks dropping in value and a reduction in the per shares earning growth (Dess et al, 2019). 

While there were numerous struggles in the following years, McDonald’s has seemed to rebound recently.  Third quarter numbers were recently reported for McDonald’s and there is reason for hope.  Projections were reached and exceeded by the company in the third quarter of 2018.  Wall Street was expecting the earnings per share to be $1.99 when, it was $2.10.  Likewise, revenue was expected to be $5.32 billion and the actual revenue was $5.37 billion (Whitten, 2018). This would seem to indicate a positive trend even though these numbers are slightly lower than the previous year.  This decline is being attributed to the fact that McDonald’s is putting large amounts of money into revamping their restaurants with features like self-order kiosks and delivery services.

2. Strategic Posture

1. Mission: McDonald’s current mission statement and objectives, as stated by their own website, are “McDonald’s brand mission is to be our customers’ favorite place and way to eat and drink. Our worldwide operations are aligned around a global strategy called the Plan to Win, which center on an exceptional customer experience – People, Products, Place, Price and Promotion. We are committed to continuously improving our operations and enhancing our customers’ experience” (History:McDonald’s, 2019).
2. Objectives: McDonald’s acknowledgers commitments to the staff at McDonald’s, the ethical practice of their business, giving back to communities, valuing the customers above everything else and several other key commitments. They are focusing on growing their global brand and continuing to provide a low cost, quality place for their customers to dine.
3. Strategies: Their first value states “We place the customer experience at the core of all we do” (History:McDonald’s, 2019).  The emphasis in this business is providing the best experience for the customer.  This is done throughout all aspects of the business, including but not limited to the quality of the food and the quality of customer service.  The second value states “We are committed to our people” (History:McDonald’s, 2019).  This statement shows how the company values their employees training and varied backgrounds that have led them to their employment.  They recognize that great service and quality food is not possible without well trained and well cared for employees.  The third value connects to the second, stating “We believe in the McDonald’s system” (History:McDonald’s, 2019).  This is essentially saying that all levels of the company, management, employees and suppliers are valued and make the company run smoothly.  The fourth commitment is very important, “We operate our business ethically” (History:McDonald’s, 2019). Not only does the company adhere to the legal guidelines of business, but they are committed to treating people fairly, honestly and with integrity.  They talk about accepting responsibility for their actions on both an individual level and a company-wide level.  Along with acting ethically, the company talks about giving back to the community in their fifth value.  They consider the opinion that McDonald’s is a global leader in business a driving reason to be a role model and find ways to give back to their community and build a better world.  The final two statements that they make deal a little more directly with the stakeholders of the company.  “We grow our business profitably” (History:McDonald’s, 2019) is an assurance to stakeholders that sustainable growth will happen.  This is most important, as any investors in the company will want to see that the company is looking towards profitable ventures.  The final value states, “  We strive to continually improve” (History:McDonald’s, 2019).  This final value may be most pertinent to the current situation that McDonald’s finds themselves in.  As technology develops and new innovations are created, the needs and desires of the customers also change.
4. Policies: McDonald’s has several policies and regulations that they list on their website.  These include an Audit and Non-Audit Service Policy, Corporate Governance Principles, Director Selection Process, Director Stock Ownership Guidelines, Directors and Officers Policy with respect to Hedging and Pledging of McDonald’s Stock, Executive Stock Ownership and Retention Policy, Standards on Director Independence and an Omnibus Stock Ownership Program.  These policies help to strengthen their commitment to not only their employees, management and customers, but also to their shareholders.  They outline their strategy to continue to be a profitable company that brings returns to their investors.

3. Corporate Governance

• Steve Easterbrook, McDonald’s President and CEO:Easterbrook has been President and CEO of McDonald’s since 2015, taking over for Don Thompson.  He had previously served as a McDonald’s restaurant manager, owner of two chains in the UK, Financial Reporting Manager, Global Chief Brand Officer, President of McDonald’s Europe and CEO of McDonald’s UK.
• Chris Kempczinski, President of McDonald’s USA:  He oversees over 14,000 restaurants here in the United States, while also having experience dealing with global strategy.  Prior to working with McDonald’s, Kempczinski served as Executive Vice President of Growth Initiatives and President of Kraft International 
• Spero Droulias is the Chief Financial Officer for McDonald’s USA and a Senior Vice President.  Spero was U.S. Vice President, Controller for 2 years, which means he was responsible for all U.S. Financial Planning and Analysis, as well as the Strategic Management and providing financial leadership to the company (History:McDonald’s, 2019).
• The McDonald’s Board of Directors is comprised of 12 different members, each with varying degrees of connection to McDonald’s.  The Chairman of the Board is Enrique Hernandez Jr, while the Chairman Emeritus is Andrew McKenna.  Steve Easterbrook, President and CEO of McDonald’s, is the top-level McDonald’s executive that is a member of the board.  The rest of the board is comprised of Robert Eckert, Richard Lenny, John Rogers Jr., Lloyd Dean, Margaret Georgiadis, John Mulligan, Miles White, Jeanne Jackson and Sheila Penrose.

4. External Environment: Threats and Opportunities

1. Societal Environment
   1. Economic trends: McDonald’s has many economic trends that have affected the business.  One economic trend that hurt McDonald’s was the recession beginning in 2001.  The year following the start of this recession, McDonald’s stock was down 40% from five years before. In 2007, the United States entered what is known as the Great Recession.  Many factors, like the housing bubble burst, caused an economic downturn and forced people to be more cautious with their spending.  This hurt the company, forcing it to find new avenues to increase revenue, like introducing McCafé (Dess et al, 2019).  The company continued to struggle, with its CEO and President stepping down in 2015 due to poor performance.  The current American economy has ridden a wave and is currently on a downtrend, which could be an area of opportunity for the company.  If they can successfully market their company as an affordable way to eat quality food, a poor economy could potentially help them as customers have less money to spend on high end dining. Unemployment rates are below 4% currently, which could be both a threat and an opportunity for McDonald’s. While there is a higher likelihood that a customer has excess money to spend, McDonald’s cannot be as selective in their hiring process when there is a smaller unemployed workforce.
   2. Technological Trends: McDonald’s has adapted to well is the rapid integration of the internet.  Features like online ordering, digital menus, mobile food deliveries and readily accessible nutrition information has been profitable for McDonald’s.  McDonald’s has shifted to a more modern restaurant, with touch screen order kiosks to allow customers experience lower queuing times (Dess et al, 2019). Apps like Uber Eats resonate with the younger generations, who have grown up fully immersed in technology and expect fast results.  While this is an area of strength for McDonald’s, there is still room for growth.  The Internet is constantly evolving, and new advancements based off being connected are frequently created.  For example, Facebook became a global phenomenon around 2007 and in recent years, companies have been able to launch massive campaigns aimed at target markets via Facebook and other similar social media sites.
   3. Political Legal Trends: The United States is in a current state of turmoil and disagreement when it comes to current government leadership.  Trump has a current approval rating below 40% and is the lowest approval rating since Ronald Reagan’s end of service ((2)).  The current government shutdown is a threat to McDonald’s as there is less money being put into the economy and government employees are currently not being paid.  With unemployment rates low, the demand for higher wages has increased.  While McDonald’s has responded to some of these demands, raising minimum wages in certain markets, this has also introduced cutbacks on labor.  McDonald’s has begun to incorporate self ordering kiosks in all of their locations, which decreases the need for cashiers, allowing higher wages to be paid to their employees.  This is an area of opportunity for McDonald’s as lower operating costs can mean higher profit margins.
   4. Soci-Cultural Trends: Social media is an example of both technological trends and socio-cultural trends.  Social media has helped to create a culture that is always connected.  This connection allows for people to be more aware of issues and health issues.  McDonald’s has been forced to change their menu due to an increased awareness of health concerns.  This could be an area of opportunity for McDonald’s despite being a weakness in the past.  Movies like Supersize Me helped to bring awareness to the lack of healthy options that McDonald’s offered at the time.  This led to the phase out of the Super-Size at McDonald’s in 2004 (Dess et al, 2019).  This trend has continued, with examples of revamping Happy Meals, marketing chicken, the “white meat”, as a healthier option and reducing the amount of sodium in their meals (Dess et al, 2019).  As advances have been made in medicine and health becomes a topic of concern for many people, life expectancies have increased.  This can be a large area of opportunity for McDonald’s if they can establish healthy options and create life long customers.

2. Task Environment
   1. Threat of New Entrants: McDonald’s has always faced the threat of new entrants into their market segment.  The restaurant industry is a crowded field that has a high turnover rate.  Businesses come and go in the industry quickly, with close to 60% of restaurants failing within their first three years.  While there are so many new businesses joining the industry, McDonald’s faces a low threat of new entrants because of the scope of their business.  While companies like Qdoba and Five Guys have built their own enterprises, new companies would need to survive over many years and build up billions of dollars of sales to take a significant portion of  McDonald’s business away.
   2. Bargaining Power of Buyers: The bargaining power of buyers is a threat that McDonald’s has faced and will continue to face.  While a business-like healthcare will always be present, a food-based business is subject to the demands of their customer base.  As stated previously, McDonald’s was forced to adapt their menu to be more health conscious after the public trended that way.  McCafé was added to the menu because of the demand for designer coffee drinks by Millennials.  When it comes to burgers, McDonald’s has lost a portion of their sales to Wendy’s because customers decided they preferred fresh, never frozen beef and McDonald’s has been forced to adapt their menu to make up for this closing gap.
   3. Threat of Substitute Products or Services: The threat of substitute products is relatively high in McDonald’s case.  As evidenced by the graph provided in the textbook, Subway surpassed McDonald’s as the most widely dispersed company in the USA.  Its products are similar to McDonald’s, as they provide the nutrition needed to sustain life, but are different enough that it could be considered a substitute.  Likewise, Five Guys and Burger King, which would be direct substitutes for McDonald’s, have experienced growth in recent years.  This threat is prevalent in the market and will continue to be something that McDonald’s will need to battle as brands like Chick-Fil-A, Qdoba and Shake Shack continue to grow.
   4. Bargaining Power of Suppliers: The bargaining power of suppliers is relatively low with regards to McDonald’s.  There are many suppliers in the market that can supply the needs of McDonald’s.  With such a large potential market to offer these suppliers, McDonald’s can dictate the terms of their partnership to some extent.  These suppliers cannot risk losing such a large partnership and smaller suppliers would need to offer low prices to compete with larger suppliers.
   5. Rivalry Among Competing Firms: The rivalry amongst McDonald’s competitors is high.  If a customer is not satisfied with any aspect that McDonald’s offers, there are a plethora of other restaurants and burger companies to choose from.  There are many different fast food chains and these chains often clump their restaurants in close proximities, like highway exits and busy city streets.  Not only does McDonald’s face the global chains like Burger King and Wendy’s, but they also must compete with the local restaurant markets. Local restaurants have the added advantage of providing local fare made with local ingredients and perhaps even offering alcohol.

(Andino 2018)

• Andino, R. (2018). McDonald’s Strategic Analysis. Retrieved January 18, 2019, from http://www.academia.edu/12017539/McDonalds_Strategic_Analysis
• Dess, G. G., McNamara, G., Eisner, A. B., & Lee, S. (2019). Strategic management: Creating competitive advantages. New York, NY: McGraw-Hill Education.
• Fast Food Nation. (2011). Retrieved January 4, 2019, from http://www.pbs.org/newshour/extra/2001/04/fast-food-nation/
• History: McDonald’s. (2019). Retrieved January 4, 2019, from https://corporate.mcdonalds.com/corpmcd/about-us/history.html
• Jargon, J. (2011, March 08). Subway Runs Past McDonald’s Chain. Retrieved January 4, 2019, from https://www.wsj.com/articles/SB10001424052748703386704576186432177464052
• Johnson, H. (2016, October 23). The true story of how McDonald’s became America’s fast food king. Retrieved January 16, 2019, from https://www.businessinsider.com/mcdonalds-history-timeline-2016-10
• Silver, N. (2019, January 17). How Popular Is Donald Trump? Retrieved January 17, 2019, from https://projects.fivethirtyeight.com/trump-approval-ratings/
• Whitten, S. (2018, October 23). McDonald’s shares rise 6% as menu price increases, global growth fuel earnings beat. Retrieved January 5, 2019, from https://www.cnbc.com/2018/10/23/mcdonalds-earnings-q3-2018.html