Trouble at McDonalds For most of its history
Trouble at McDonalds
For most of its history, McDonalds 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, McDonalds has grown into the largest restaurant chain in the world, with almost 37,000 stores in 120 countries.
For decades, McDonalds 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, McDonalds 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. McDonalds also developed close ties with wholesalers and food producers, managing its supply chain to reduce costs. As it became larger, buying power enabled McDonalds 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 McDonalds; 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, McDonalds 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 McDonalds 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 McDonalds added grilled chicken sandwiches, chicken wraps, Southern-style chicken sandwiches, and more recently, chicken for breakfast to their menu. Chicken sales doubled at McDonalds between 2002 and 2008, and the company now buys more chicken than beef.
McDonalds also shifted its emphasis on beverages. For decades, drinks were an afterthought, but executives couldnt help but note the rapid growth of Starbucks. In 2006, McDonalds decided to offer better coffee, including lattes. McDonalds 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 McDonalds 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, McDonalds was once more running into headwinds. Same-store sales declined in 2014, impacting profitability. Among the problems that analysts identified at McDonalds 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 McDonalds. A recent Consumer Reports survey ranked McDonalds burgers the worst among its peers. Another problem is that the quality of customer service at McDonalds seems to have slipped. Many customers say that employees at McDonalds are rude and unprofessional. One reason why McDonalds 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 McDonalds 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 McDonalds starting to see faster growth and better profitability.
Case Discussion Questions
- What functional-level strategies has McDonalds pursued to boost its efficiency?
- What functional-level strategies has McDonalds pursued to boost its customer responsiveness?
- What does product quality mean for McDonalds? What functional-level strategies has it pursued to boost its product quality?
- How has innovation helped McDonalds improve its efficiency, customer responsiveness, and product quality?
- Do you think that McDonalds has any rare and valuable resources? In what value creation activities are these resources located?
- How sustainable is McDonalds competitive position in the fast-food restaurant business?
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