Problem Case:

McDonald’s Survival Strategies?

Can Gozubuyuk

BU-598- Applied Business Research and Communication Skills-Spring

Quarter 2010-

Newport Beach Campus

Judith Mann

April 23, 2010

Introduction

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—Burger King, Wendy’s, and Taco Bell—the firm
encountered new challenges. Sonic and Rally’s 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.

Facts

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 Speedee 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. Its average annual return on equity was 25.2%
between 1965 and 1991. But the company found its sales per unit
slowing between 1990 and 1991. In addition, McDonald’s share of the
quick service market fell from 18.7% in 1985 to 16.6% in 1991. Plus
growth in the quick service market was projected to only keep pace
with inflation in the 1990s.
 
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 that the familiar Golden Arches for
their families.
 
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. For example, in 1989,
53% of respondents in one survey revealed that they had not bought
a product because they didn’t know what effect the packaging would
have on the environment. Closer to home, a 1990 study showed that
each McDonald’s generated 238 pounds of on-premise solid waste per
day.

It’s no surprise, then, that McDonald’s sought a way to reduce its

solid waste while providing a more environmentally acceptable face to
the public. Beginning in 1989, it partnered with the Environmental
Defense Fund, a leading organization devoted to protecting the
environment, to seek ways to ease the company’s environmental burden
on the landscape.
 
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.
 
Some of the environmentally inspired solutions that came out of the
collaboration with EDF were the:
 Introduction of brown paper bags with a considerable percentage
of recycled content.
 Solicitation of suppliers to produce corrugated boxes with more
recycled content, which had the twin effect of reducing solid
waste and building a market for recycled products.
 Abandonment of polystyrene clamshell containers to hold
sandwiches in favor of new paper-based wraps that combined
tissue, polyethylene, and paper to keep food warm and prevent
leakage
Analysis

McDonald’s Sustained Prosperity

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.

Key Threats
The key threats to McDonald’s domestically are the lack of growth
opportunities. The market is well saturated, and it would difficult to
achieve double-digit growth. Other concerns are a newfound emphasis on
healthier eating. Most of McDonald’s most popular fare probably in some
small way contributes to the increasing incidence of cancer, heart
disease, and diabetes among the population.

But I feel the key threat to McDonald’s continued success is its very
ubiquity. Because McDonald’s are everywhere, the dining experience is
never special. And as Baby Boomers age and become more affluent, it is
likely that they will leave behind their fast-food ways, if only to step up
to moderately priced restaurants like Olive Garden, Bennigans, and
Pizzeria Uno. These chains have the added advantage of serving higher-
margin alcoholic drinks. McDonald’s, meanwhile, has to continually battle
Burger King and Wendy’s, which leads to an erosion of margins for
everyone. Even alliances with toy manufacturers, while popular with
consumers, do little for the bottom line because the cost to run these
promotions can be quite expensive.
Responding to Burger King’s October 1 Announcement
The October 1 announcement from Burger King that it would begin
offering table service is not much of a threat at all. You can try to
dress up fast food, but it is still fast food. I couldn’t imagine this being
a potent draw for consumers. McDonald’s best course is to ignore this
development as irrelevant. As the market leader, McDonald’s does not
need to respond to every competitor’s initiative. Indeed, doing so would
have the effect of making McDonald’s look reactive and less like a
leader.

The advantage of not responding to Burger King’s initiative is that the

company can preserve its resources for other marketing thrusts that
may provide a bigger payoff. The disadvantage of not responding to
Burger King’s initiative is that you allow the firm to establish itself in a
unique way in the minds of consumers—that of a fast-food restaurant
that provides sit-down service. But again, is this inherent contradiction
of fast-food fare and upscale dining experience likely to resonate with
consumers? I would say no. If Burger King’s initiative does prove popular
with consumers—as evidenced by expanding sales and market share—
McDonald’s would be forced into catch-up mode. But I think that this is
a risk that the company should be willing to take.

Promoting Flexibility Through Its Operating Strategy

The key thing that McDonald’s operations strategy has to support is
experimentation. Now somewhat long in the tooth, McDonald’s needs a
breakthrough that will provide new avenues of growth. It has a long
history of such experimentation, which has resulted in some new profit
centers like Chicken McNuggets and the breakfast menu. Some later turn
out to be duds like the McLean Deluxe, but inevitably experimentation
in limited outlets offers McDonald’s a way to retain its key strengths—
quality and consistency—while continuing to evolve for new palates and
pocket books.

 
McDonald’s and the Environmental Defense Fund
In some ways, partnering with the Environmental Defense Fund was a
masterstroke. It brought both respectability and valued expertise to its
environmental efforts. It also provided a primetime venue for EDF to
make a difference. Any successes, even if only incremental improvements,
would have major ramifications because of the sheer size of McDonald’s
operations.

McDonald’s should continue its partnership with EDF. With ecology a

growing concern among consumers, it makes sense to be a good
corporate citizen and get all the public relations accolades that go along
with such an alliance. It also pays off in the bottom line by reducing
shipping costs for supplies as well as garbage removal fees.

McDonald’s would do well to stay in the vanguard of corporations who

have become environmentally aware. If it tries to shirk its
responsibilities, it can foresee a public relations nightmare in the
making. But if it does manage to come up with some breakthroughs
through its collaboration with EDF, it can score a tremendous amount
of goodwill with the public, which may even provide a halo effect to
mitigate any other PR troubles.

How far should McDonald’s go on environmental issues?  There is

definitely a public relations benefit in being seen as an environmental
leader, and the collaboration with EDF goes a long way in making that
happen. Still McDonald’s has had a lot of success in giving its
franchises some latitude in developing new solutions.

The line in the sand in determining how far McDonald’s should go with
its environmental efforts is determined by the cost of the initiative
relative to the hard-dollar benefits and harder-to-quantify public relations
buzz it gets from being in the forefront on environmental issues. The
bottom line is that environmental efforts can’t detract the company from
its primary mission of providing consistent quality to consumers. If
environmental efforts start to be a drag on the company’s future profits,
it’s time to ease up. Ideally environmental initiatives should pay for
themselves by reducing other kinds of costs.

Dealing With the Product Range Explosion

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. This would have the effect of enlivening the
product menu, without the need to go head to head with competitors
on price.

This slackening of per unit sales might also indicate that McDonald’s
critical success factors have changed. Perhaps in the new environment,
fast, convenient service is no longer enough to distinguish the firm. At
this time, a new critical success factor may be emerging: the need to
create a rich, satisfying experience for dinner consumers.

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.

Because 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.

Indeed, McDonald’s has the opportunity to apply its core competencies—

scrupulous adherence to quality standards and continual promotion of
experimentation—in new venues. Imagine, if you will, McDonald’s opening
a new casual dining restaurant under the name of Splendor. It could
then franchise that concept nationwide and get some of the dollars from
consumers who have grown past fast food. But its fastidious approach to
operations would ensure that consumers everywhere would experience
the same dining experience—a tremendous advantage for consumers who
don’t want to be surprised with a bad meal.

McDonald’s could try a number of concepts simultaneous in different

parts of the country. Those that seemed promising could be rolled out
further. The duds could be left to die quickly. While this will be an
expensive undertaking, it holds the potential to unleash new areas of
growth in a maturing market.

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. 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.