Florida A&M University
School of Business & Industry
Excellence with Caring
McDonald's Corporation Case Analysis
Final Exam
Prepared By
Marquita Taylor
Prepared For
Dr. Nwabuzor
In partial fulfilment for the requirements of
MAN 5721 — Business Policy & Strategic Management
August 3, 2009Introduction
MeDonald’s Corporation has had a long commitment to increasing revenues and
sustaining growth in the industry. The company, however, has faced many legal issues
surrounding the quality of its food products and what impact this has had on consumers. Even
through all the litigations, the company has still managed to sustain its growth and continue to
rank number in many areas of the fast food industry.
Mission Statement Analysis
The mission statement is a statement of purpose that tells where the company wants to go
over a period of time. This statement answers the question of “what is our business” and “what is
our reason for being?” A clear mission statement is essential for effectively establishing
objectives and formulating strategies. A good mission statement must have exhibit seven out ten
components of a mission statement. It must be broad and coneise, no more than 250 words,
inspiring, identifies some use of the organization’s products and services and assert some form of
environmental responsibility. McDonald’s Corporation's mission statement is as follows:
"MeDonald's vision is to be the world's best quick service restaurant experience. Being
the best means providing outstanding quality, service, cleanliness, and value, so that we make
every customer in every restaurant smile.”
‘Components Present Not Present
1. Customers ee x
2. Products or Services aie
3. Markets x a
4. Technology paar5. Concem for Survival, Growth, and
Profitability
x
6. Philosophy
7. Self-Concept
8. Concem for Public Image
9. Concer for Employees
>| os | os | oe | >
10. Concern for Owners
‘McDonald’s mission statement is inadequate as it only covers 3 of the 10 components of an
effective mission statement, The company’s mission statement should be revised as follows:
"McDonald's vision is to be known as the world's best quick service restaurant
experience. Being the best means providing outstanding customer service, the highest quality and
value at the lowest possible prices consistent with a fair return on investment for our
shareholders, sustainability and growth in the industry, job enhancement/security for our -
employees, and a level of community involvement by everyone connected with our business.
sitive to make every customer in every restaurant smile.”
‘This revised statement satisfies 7 of the 10 components, which now makes it an adequate mission
statement. (Components: 1, 2, 3, 5, 8, 9, 10)
External Audit
Economic Forces
‘The fast food industry has a major impact on the economy and many assume that this
industry is recession proof because of the affordable pricing of its products, Even during a timeas such, fast food companies are looking to expand and open new stores across the nation. Many
believe that this is a good thing for the economy because it will create jobs for many individuals.
Social, Cultural, Demographic, and Environmental Forces
A few of years back, the “healthy eating” swept the US and many individuals were
looking to cut back on fast food and focus more on healthier food items. This trend forced many
fast food companies to offer healthier choices of their menus which would target the health
conscious group. However, this is off-set by the vast number of working or single moms who do
not have the time to make a healthy meal for their children.
Political, Legal, and Governmental Forces
MeDonald’s has faced many legal challenges from activists, consumers, labor unions,
medical, and religious groups around the world. In recent years, McDonald’s has been under
scrutiny as aiding the obesity in children crisis that has faced many US children, The company
was sued by California medical doctors for having carcinogens in the chicken menu items
served. There has been a trend in many fast food chains to reduce the use of trans fatty acids in
its cooking oils. McDonald’s failed to do so even after a settlement was reached. ‘The company
‘was also under scrutiny for distributing meal vouchers, balloons, and toys to sick children in the
United Kingdom. McDonald’s has to be more responsible socially in order to inerease consumer
confidence.
Technological Forces
‘The internet has become increasingly viable for most companies” success in its given
industry. This is no different for McDonald’s. The shift to new and up-to-date computer systems
increases speed and service which is one of the industry’s key success factors, The internet,
however, will allow customers to locate a store near them, look at menu options, and apply forpositions at a particular store. These trends has have helped the company be more responsive to
its consumers by increasing customer service,
Competitive Forces
Porter's Five Forces Model
1. Rivalry Among Competing Firms
a, The company currently competes with international, national, regional, and local
retailers of food products, including restaurants, quick-service eating
establishments, pizza parlors, coffee shops, street vendors, convenience food
stores, delicatessens, and supermarkets. With this long list of direct and indirect
competitors, competition is high for the company.
2. Potential Entry of New Competitors
a. The fast food industry is highly involved in franc!
ising and because of this, many
fast food chains are popping up all over the country. However, because of the
controversy over these companies contributing to the obesity crisis, this force is
only moderate,
3. Potential Development of Substitute Products
4. Ithas previously been stated that McDonald’s not only competes with other fast
food companies, but other restaurants, supermarkets, etc. Since the demand of
healthier foods increased, the development of substitute products is much higher
than before.
4. Bargaining Power of Consumers
a. When customers buy in volume, their bargaining power represents a major force
affecting the intensity of competition in an industry. Because there are asubstantial amount of substitutes, buyers are able to inexpensively switch to
competing brands with ease.
5. Bargaining Power of Suppliers
a. Some of the main suppliers of McDonald’s include some big name companies
such as Nestle, Quaker, and Coca Cola to name a few. Because these suppliers are
very large and supply thousands of businesses all over the world, their bargaining,
power is extremely high.
External Factors Evaluation (EFE) Matrix
‘An Extemal Factors Evaluation Matrix allows strategists to summarize and evaluate a
company’s external environment. This matrix will determine how well the company is
responding to factors that it has no control over.
External Factors Evaluation Matrix |
Key External Factors |
‘Opportunities Weight | Rating | Weighted
ot Score
1. More international expansion — ‘oro 3 030
2. Health conscious trend 0.10 2 0.20
3. Dine out market growing 0.05 3 0.15
[4 Joint ventures with supermarkets 0.05 2 0.10
5. Focus on social responsibility 0.15 2 030
‘Threats :
“. Strengih of competition — 070 a 00
2. Changing demographic 0.05 3 0.15
3. More health conscious consumers 0.15 2 030
4. USS. market large and very fragmented 0.15 2 030
5. Obesity crisis in U.S 0.10 2 020
Total 1.00 240
McDonald’s EFE score is slightly below which indicates must do a better job in
capitalizing on opportunities and combating its threats. The company has a strong presence in the
industry but in order to keep this strong position, McDonald’s should address issues such as thehealth conscious trends and become more socially responsible. This trend will help increase
consumers’ perception of the company.
Competitive Profile Matrix (CPM)
Once a company’s extemal and intemal factors have been properly assessed, one can
‘move on to compare the company to its competitors in the industry. This will provide the given
pare Ip
firm with important strategic information.
Competitive Profile Matrix
‘MeDonald’s [Burger King | Yum Brands | Wendy's
Gritical Competitive Weight | Rating | Score | Rating | Score | Rating | Score | Rating | Score
Variables
T. Quality of food 15 3 45]; 3 | 45] 2 30 | 2 | 30
2. Capital 15 4 [| 2 {30{ 3 | 4 | 2 | 45
Safety 12 [3 | 36 | 3 | 36 | 3 36 [3 | 36
4 Company Name, 08 4 [32 [4 | 3273 3 | 24
Brand Name, and
Reputation
Value based 12 3 | 36 {| 3 | 36] 3 | 36 | 4 |
pricing
6. Innovation and “10 3 [30] 2 [20,2 | 2] 2 | 20
Process Technologies
7. Global Expansion 10 4 [| 40 | 3 30 | 3 [30 | 2 7 20-
8 Market Share 10 4 | 40 20 30 20
9. Promotions 08 4 | a2 3 cae ae ie
Total | 1.00 351 281 25 2.59
McDonald’s CPM score is well above the average of 2.5 which indicates that the
company is responding quite well to its critical factors. The company has a strong presence in the
industry and may need to make some minor changes. Overall, the company is seems to be ingood standing in the industry and will continue to be an industry leader if it focuses on these
critical factors.
Internal Audit
Management
MeDonald’s Corporation is spearheaded by CEO Jim Skinner. This organization engages
ina lot of franchising. This brings in new management at the store level, and helps to increase
revenue for the overall business. This means that each store owner is responsible and
accountable for the planning of its goals and objectives. The venture is good for the company
because it can collect royalties without having to invest in capital.
Marketing
Over the years, McDonald's has developed many TV advertising campaigns. McDonald's
commercials have focused not only on product, but rather on the overall McDonald's experience.
This "image" or "reputation" advertising has become a trademark of the company and created
many memorable television moments and themes. The company has come up with numerous
‘ways to market its products which include teaming up with production companies of children
movies to offer themed Happy Meals, and toys.
Finance and Accounting
‘The case has revealed that McDonald’s Corporation’s financial performance is quite
impressive. The company continues to have “revenue growth, increased customer visits, and
enhanced profitability as the company invested in new products, menu choices, modem
restaurants, and providing attractive value in the first quarter of 2007.” It has also achieved sales
gains four consecutive years,Operations & Production
McDonald's is the largest food service company in the world. The company regards itself
as the leading global food service retailer. The company has more than 30,000 restaurants
serving more than 47 million people each day in 121 countries. The company prides itself on the
ability to successfully innovate and standardize products. In this sense, technological
competencies are much needed.
Research and Development
The case did not reveal much about MeDonald’s R&D, but one can assume that the
company has done well in coming up with new and innovative products. The company continues
to invest in new products and menu choices. This aspect will keep customers frequenting
McDonald’s restaurant because of the additions to the pipeline as well as improvements made to
the existing products that may not be doing as well as others.
Financial Ratios and Possible Implications
Liquidity Ratios: Measures a firm’s ability to meet maturing short-term obligations.
Current Ratio 2006 ~ 1.21 2005 ~ 1.51
16 2005 ~ 1.48
Quick Ratio 2006 —
MeDonald’s current ratios for years 2006 and 2005 are slightly below the recommended 2 to 1
ratio, This means that the company may have a little difficulty in meeting its short term
obligations. On the contrary, the company’s quick ratio for 2006 and 2005 indicate that the
company will not have to rely on the sale of its inventory. Both ratios decreased from 05 to 06,
but are still fairly good,
Leverage Ratios: Measures the extent to which a firm has been financed by debt.
Debt-to-Total- 2006 -0.47 2005 -0.49Assets Ratio
Debt-to-Equity 2006 ~ 0.88 2005 -0.98
Ratio
Long-Term 2006 - 0.54 2005 - 0.59
Debt-to-Equity
Ratio
From the above ratios, McDonald’s seems to be relying less on creditors to fund its business.
‘This means that the company will have less debt to repay in the long run.
Activity Ratios: Measures how effectively a firm is using its resources.
Inventory 2006 - 144.8 2005 ~ 137.4
‘Tumover
Fixed Assets 2006 - 1.96 2005 -2.00
Turnover
McDonald’ is increasing its inventory turns from 05 to 06. This means that its products less
likely to suecumb to obsolescence or spoilage. This is extremely important for this industry.
Profitability Ratios: Measures management's overall effectiveness as shown by the retums
generated on sales and investment.
Operating Profit 2006 - 19.30 2005 ~ 18.52
Margin
Return on Assets 2006 —0.12 2005 ~ 0.09
Returnon Equity 2006 0.23 2005 -0.17
Earnings Per 2006 — 2.83 2005 - 2.04
Share (EPS)
‘The company has improved all profitability ratios from 2005 to 2006. This indicates that
management's effectiveness as shown by the returns generated in sales and investment are fine.Internal Factors Evaluation (IPE) Matrix
Conducting an Internal Factors Evaluation Matrix will help evaluate how well the
company is utilizing its strengths to mitigate the adverse effects of its weaknesses. Based on
information provided in the case, McDonald’s IFE score is listed below with its strengths and
weaknesses.
Internal Factors Evaluation Matrix
Key Internal Factors =
Weighted
Strengths Weight Rating Rating
1, Global presence 0.15 4 0.60
2, Steady growth in revenues, operating income,
and assets 0.10 4 0.40
+3. Successful innovation and standardization of
products 0.10 3 0.30
4, Brand name recognition 0.10) 4 0.40
‘5. Boost in dividends 0.10 3 030
| Weaknesses
1. Legal issues that hurt reputation 0.10 1 0.10
[ 2. Quality of produets 0.15 a 030
3. Core products not inline with shifting trends 0.05) 1 0.10
4. Advertisements that target children 0.05; 2 0.10
5. Restaurant to franchise conversion declined
revenues Zi 0.10 2 020
Total: z 1.00) 2.80
MeDonald’s current [FE score is above average which points out that the company is
doing well playing on its strengths and suppressing its weaknesses, However, there are some
areas in which the company should improve upon which are the legal issues that they faced and
having its core products not in line with the shifting of market trends. The company should
consider introducing new products into its pipeline and positively respond to the legal issues that
it faced.
10TOWS Matrix
‘The TOWS analysis is an extension of the SWOT analysis. The formation of a TOWS
Matrix consists of listing a number of strengths, weaknesses, opportunities, and threats. The
analyst then formulates possible strategies by matching Strengths & Opportunities, Weaknesses
& Opportunities, Strengths & Threats, and Weaknesses & Threats.
Strengths
1
2,
Global presence
Steady growth in revenues,
‘operating income, and assets
Weaknesses
1
2
Legal issues that hurt
reputation
Quality of products
3. Successful innovation and 3. Core products not in line with
standardization of products shifting trends
4, Brand name recognition 4. Advertisements that target
5. Boost in dividends children
5. Restaurant to franchise
‘conversion declined revenues
‘Opportunities ‘SO Strategies WO Strategies
1. More international 1. Expand into emerging markets | 1. Increase promotions to
expansion such as China and India (SI, include healthier menu items
2. Health conscious trend on for children (W4, 02, 05)
3. Dine out market growing 2. Expand menu to inelude 2. Promote positive change in
4. Joint ventures with healthier food items ($3, 02) food ingredients (W1, 02)
supermarkets 3. Use brand name to increase 3. Invest in new product designs
5. Focus on social charitable work and create w2, 04)
responsibility “Green” campaign ($4, 05)
Threats ST Strategies WT Strategies
1. Strength of competi 1, Pass on profits to shareholders 1 Create promotional ads that
2. Changing demographics (82, 85, T4) target other demographics
3. More health conscious 2. Develop new product and portray/good quality
‘consumers offerings to differentiate from products(W2, T2)
4. US. market large and very competitors ($3, TI) 2. TargeyChildren with healthier
fiagmented kkids/menu items (W4, T5)
5._Obesity crisis in U.S
Quantitative Strategic Planning Matrix (QSPM)
‘This matrix is based on management's intuition on what they feel should be the best
strategy to implement, It takes into account the internal and external factors facing the company
and how each of these factors would affect the alternative strategies that have been derived. After
uall alternative strategies are assessed, the strategy with the highest score will be the one chosen
for the company to implement,
Key Factors Weeiy| ‘Strategic Alternatives
Expand menu | Expand into | Develop new ] Pass on profits
toinclude | emerging —_| product to
healthier items | markets offerings | shareholders
(China &
India)
V AS TAS [AS |TAS [AS [TAS |AS [TAS
More international o10 | 1 | o10 | 4 | 040 | 1 | o10] 1 | o10
expansion
Tealth conscious wend o10 [4 [040 | 3 | 030 | 4 | 040] 1 | 010
Dine out market growing o10 | 1 [010 | 1 [010 [1 [oio [1 | 010 |
Joint ventures with
Hares 00s | 1 | 005 | 2 | o10 | 4 | 020] 2 | o10
Focus on social
ean 0.10 o40 | 2 | 020 | 4 | 040] 1 | o10
Threats 0.10 020 | 3 | 030 | 4 | 040 | 1 | 010
Strength of competition
Changing demographics oos | 1 | 005 | 2 | o10 | 3 | 015 | 1 | 005
More health conscious O15 4 0.60 1 0.15 4 0.60 1 0.15
consumers
USS. market large and very
igen 0.05 oos | 4 | 020 | 1 | 00s | 2 | o10
Obesity crisis in US ois | 4 | 060 | 1 [01s [3 [04s [1 | ons
‘Strengths 0.10 1 0.10 4 0.40 1 0.10 x 0.20
Global presence
Steady growth inrevenues, [gig [1 |oi0 | 1 | 010 | 2 | o10 | 4 | 040
operating income, and assets
Successful innovation and | 0.10 | 3 | 030 | 1 | 010 | 4 | 040] 2 | 020
standardization of products a
‘Brand name recognition aio | 2 [020 | 3 | 030] 11010] 1} 010
Boos in dividends 010 | 2 [020 | 2 | 020] 1 | 010] 4 | 040
lenesses
ak ois | 3 | 045 | 2 | 030 | 3 | 045] 2 | 030
reputation :
Quality of products 015 | 2 | 030) 1 | 015 | 4 [060] 2 | 030
Core products nat in Tne o10 | 4 | 040 | 1 | 010 | 4 [040] 1 | o10
with shifting trends
12Advertisements that target [0.10 | 3 | 030 [ 1 | 010 | 1 | 010] 1 | 0.10
children
Restaurant to franchise
convection Acting’. 0.05 | 1 | 005 | 2 | 010 | 1 | 0.05 | 2 | 0.10
revenues -
4.95 3.85 5.25 325
Based on the scores above, the strategy that should be chosen for the company to
implement is to develop new product offerings. There has been much talk about a trend in more
health conscious food items. This trend could affect sales for the company if consumers choose
not buy its products because it does have healthier options. Product offerings should not only
come in the form of healthier items, but also should include items that would differentiate
McDonald's from its competitors. The company should think about maybe developing fruity
iced drinks or different types of desserts. This could enhance the company’s already strong
position in the industry,
Implementation
With the implementation of a new strategy, management may experience some problems.
CEO, Jim Skinner is looking to achieve his “Plan to Win” strategy and is seeking to give a lot of
its earnings back to shareholders in hopes in keeping their confidence in the company. However,
| feel that the best decision would be to take the earnings and find a way to pass this on to the
customers which are the reasons for being in business and achieving its sales growth. With this
stated Skinner may encounter issues such as restructuring or re-engineering, resistance to change,
developing a strategy-supportive culture, and/or adapting production/operations processes,
Because this strategy is not directly related to shareholders, there may be some resistance to
change initially because employees want their ‘piece of the pie” for their own strategies. It will
be up to management to effectively deal with these conflicts as they may arise.
13In order to successfully manage this conflict, Skinner should use the confrontation
approach in which he would hold a meeting where conflicting parties would present their views
and work through their differences. This will hopefully cut down tension among employees and
reach a decision that would benefit all in some way. In the end, however, Skinner would render
his decision on which strategy he feels would best benefit the company.
Conclusion
MeDonald’s Corporation has been doing quite well in its industry among competitors. It
has a long reputation for innovation and strong marketing campaigns. However, over the resent
years there has been a change in market demand, and a shift in consumer perception in quality
fast foods. McDonald’s needs to address this issue in order to keep its position in the industry.
Skinner would like to give back to the shareholders of the company, but I think it would benefit
the company more if it were to respond aggressively to the changes in the market which could
have a positive impact on its shareholders in the long run.
14