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    Unit | Case Study Read the Cohesion Case on pages 27-37 In the course textbook. Create a five- to seven-page PowerPoint presentation in which you a) briefly describe your view of McDonald's strategic position, and b) answer Step 4 of the Assurance of Learning exercise on page 37. Unit II Case Study Complete the Assurance of Learning Exercise 30 on page 87 of the course textbook. in addition to completing Steps 1, 2, and 3, summarize your findings in a two-page APA formatted paper and discuss ‘your views of McDonald's strategic prospects based upon your analysis of the external assessment and consideration of the opportunities to grow, as well as threats from competitors and the macro environment. THE COHESION CASE 27 (NN) THE COHESION CASE McDonald's Corporation—2009 Vijaya Narapareddy University of Denver wwwwmedonalds.com On May 5, 2009, MeDonald’s Corporation (MCD, hereafiet) and Slarbucks went full force cam- rigning for the attention of coffee connoisseurs. Following its success with McCafés in Europe, ‘MCD surprised Starbucks with its announcement to offer lates and mochas in its MeCatés in the United States. In an attempt to woo rival Starbucks’ customers, MCD promised to offer premium taste at bargain prices. This announcement came at atime when Starbucks, hard hit by losses, war losing hundreds of stores in the United States. The MCD-Starbucks fight is everywhere on the tube, in print and the airwaves. MCD even taunts Starbucks with ads on buses and billboards tat read “4 bucks is dumb.” Starbucks is retaliating by placing newspaper ads that read “Beware of a cheaper cup of coffee. It comes witha price.” In April 2009, MCD reported strong sales growth in the first quarter of 2009 in spite of reces- ary conditions worldwide. MCD sales in the United States increased by 4.7 percent, in Europe by 3.2 percent, and in Asia/Pacific, Middle Bast, and Africa by 5.5 percent. But as the U.S. dollar gained strength against most currencies, especially the euro, British pound, Australian dolla, Canadian dollar, and the Russian ruble, MCD experienced $642 million in foreign currency teunslation fosses inthe frst quarter of 2008, as indicated in Exhibit I. Undetersed, however, MCD. is forging ahead with a renewed commitment to allure coffee enthusiasts away from rivals, big and small History McD was launched in 1940 when brothers Dick and Mac MeDonald opened a restaurant in San ‘Bemadino, California, However, the credit. ‘of growing the corporation into a franchised, global oper- son i atibuted to Ray Kroc, who acquired equity from the MeDonald brothers and isok ine he in 1965. MCD has a realy coo! history timeline called “Travel in Time with Us" locate a the {tosvarw.aboutmedonalds.com/medour_companylmed_history.html Web page. It reveals inform, ‘ion such as the following: 1979 MCD introduced Happy Meals 1981 MCD opened stores in Spain, Denmark, andthe Philippines 1983 MCD entered its 32nd country 1984 Ray Kroc passed away 1987 MCD introduced Fresh Salads 1990 MCD opened a store in Moscow, Russia 1992 MCD opened a store in Warsaw, Poland 1995 MCD’s new ad was “Have You Had Your Break Today’ 1996 www.medonalds.com Web site introduced 1997 MCD’s new ad was “Did Somebody Say McDonald's 2001 The Big N’Tasty sandwich introduced 3003 MCD introduced Premium Salads and its “Plan to Win’ strategy 2006 MCD introduced Snack Wraps Ea EE ‘ap PART « OVERVIEW OF STRATEGIC MANAGEMENT EXHIBIT 1 Impact of Foreign Currency Translation (Sin millions, excePt jer share data) _—_——— currency “ansiation ProfitLoss) Quarter ended March 31 2009 2008 in 2008 Revenues gona 548 OH) ‘Company-operated margins 564.2 659.2 2s) Franchised margins iags0 «13162 (12.0) Selling, general, and administrative expenses 4913 552.4 43.0 Operating income yacoa 1628 (137.9) Net income 919.5 946.1 (962) Barnings per share—diluted 087 ost (0.08) Barings perstaxe ‘Source: SEC 10-0, May 5, 2009. sroday, MCD Is the largest slabal food serves retailer, with over 31,000 restaurants if 116 counties serving more than 58 milion ease saat day. Exhibit 2 shows MCD's global tes Sons The number of retanrans held and pete by MCD in 2008 and 2009 i ea O02 1estentes steady growth in every county of operation except forthe United Kingdon where the growth is flat. EXHIBIT 2. MCD's Number of Restaurants Worldwide ‘As of March 31 2009 2008 _Increase us. Bee 13871 2 Burope Germany 3337 4,801 United Kingdom yas 1192 - France 41351108 Spain 393 379 4 Italy 381 363 8 thes 2212 2142 0 ‘Total Europe 6650685. 168 ‘APMEA (Asia/Pacific/ Middle East/Asia) a Japan 3746 30737 9 china 4074 out 163 Australia 782 762 20 ‘Taiwan 347 346 other 2378 2216 162 ‘Total APMEA e307 7972 355 ‘Other Countries and Corporate Canada i4ig 1.408 u Brazil 563 553 10 Mexico 382 365 7 Other sat 785 36 ‘Total Other Countries and Corporate 3853 4 ‘Systemwide restaurants 32,060 31,439 on ‘Total Countries 18 118 =z “Source: SEC 10, date Feria 25,2009, THE COHESION CASE 29 Internal Issues Organizational Structure MCD's top leadership has seen some turnover recently. The position of controller stands vacant, and the McDonald's USA group currently includes new executives to head its East and West Divisions. Exhibit 3 provides a list of MCD's top leadership as well asthe firm's organizational chart, Note that MC's operations are organized into a geographical structure with four key segments, ‘These four segments are (1) MeDonald’s—USA, (2) MeDonald’s—Europe, (3) McDonald's APMEA (Asia/Pacific, Middle East, and Aftica), and (4) MeDonald’s—Other Countries and Conporate. Finances In addition to the steady growth in the numberof restaurants, MCD exhibited strong financial per formance by geographic segment between 2008 and 2009, even as the worldwide ceomonic wf negatively impacted MCD’ key competitors. As shown in Exhibit 4, rovenues and operating mon gins inthe thre key segments (United States, Europe, and APMEA) rose steadily in 2006 trough 2008, offseting dectnes inthe “Other and Corporate” segment. MCD delivers consistently good performance, making ite darling for investors. In April 2009, ‘major industry analysts rated MCD as a “buy,” suggesting low levels of risk for investors, MC's EXHIBIT 3 McDonald's Corporation: Executive Officers and Organizational Chart Psat Chie Financ! McDonalds USA Say "Ss Mor aboutmedoals conncdfour_company/ios nl 30 PART 1 + OVERVIEW OF STRATEGIC MANAGEMENT EXHIBIT 4. Select Financial Data by Geographic Segment In millions 2008 2007 2006 us. $ 8078.3 79055 S 7464.1 ‘Burope 9,922.9 8,926.2 7631.7 'APMEA (Asia/Pacific/Middle East/Africa) 42308 3.5989 3,0535 ‘Other Countries & Corporate 12904 2,356.0 2,739.9 ‘Total revenues $23,524 $22,7866 __$20,895.2 US. $ 3059.7 28419 $ 2,657.0 Barope 2,608.0 2.1254 1,6102 APMEA 8188 6163 2364.4 Other Countries & Corporate 3.6) (4,704.6) 298.6) ‘Total operating income $ 6442.9 $3870 ___S_4.433.0 v. $$10,356.7 $100318 $9474 Europe 105327 11,3804 104139 APMEA 40746 41453 3,727.6 Other Countries & Corporate 34975 3,8342 35294 ‘Businesses held for sale 1,631.5 Discontinued operations 1947 ‘Total assets $28,461.58 $2939.71 $28974.5 us. $8374 $ 8051 § 1743 Burope 864.1 6874 504.9 APMEA 360.6 3028 208.1 Other Countries & Corporate 6 973 854 431 870 103 822, ‘Total capital expenditures $ 2138.7 19466 1,741.9 US. $4009 s 4027 -$ 3905 Burope 506.3, 4233 4364 APMEA 193.4 178.1 ims Other Countries & Corporate 1072 112.6 1104 26.41 818 213 590 $ 12078 Siziat —_$ 1.2499 Source: SEC 10-K, February 25,200, financial statements presented in Exhibit 5 demonstrate the enthusiasm of the analyst comnnunit Jina UD income stitement provided in the exhibit demonstrates continuous sn steal revenue growth, Total revenues grew from $20.9 billion in 2006 to $22.8 billion 2007 seven growth Tye! trates into an anual growth of bos 9. prea 00 20 Spo7 ae 3.1 percent from 2007 to 2008, Net income shows a slightly ifferent trend. NS ioe aietaun iy 32.4 percent etieen 2006 and 2007 but regains momentum by growing 89 P from 2007 to 2008, or MCD's consolidated balance sheet presented in Exhibit 6 depicts a decline in total assets Neth she company from about $29.02 billion in 2006 o bout $28.5 billion in 2008, At the san i Tong tenn debt al esined earings increased significantly, Because the interest rte o8 shot THE COHESION CASE 34 EXHIBIT 5 McDonald's Consolidated Statement of Income In millions, except per share data __Years ended December 31 2008 2007 2006 REVENUES Sales by Company-operated restaurants $165609 $16,610 $15,402.4 ‘Revenues from franchised restaurants, 6,961.5 6,175.6 5,492.8 ‘Total revenues 235224 2,786.6 20,895.2 OPERATING COSTS AND EXPENSES ‘Company-operated restaurant expenses Food & paper 5,586.1 54874 5111.8 Payroll & employee benefits 4300. 43316 3,991.1 Occupancy & other operating expenses 3,166.7 3.9227 3,802.2 Franchised restaurants-occupancy expenses 1,230.3 1,139.7 1,058.1 Selling, general & administrative expenses 23555 23670 2,208.7 Impairment and other charges, net 60 16703 134.2 Other operating (income) expense, net (165.2) ay 9.1 ‘Total operating costs and expenses 17,0795 189076 16,462. Operating income 6442.9 3879.0 4,433.0 Interest expense-net of capitalized interest of $12.3, $6.9 and $5.4 522.6 410.1 4019 "Nonoperating (income) expense, net 76) (103.2) (123.3) Gain on sale of investment (160.1) Income from continuing operations before provision for income taxes 6,158.0 35721 41544 Provision for income taxes 1,844.8 1,237.1 1,288.3 Income from continuing operations 4313.2 23350 2,866.1 Income from discontinued operations (net of taxes of $34.5 and $101.9) 60.1 678.1 Net income $43132 S23951___$3,5442 Per common share-basie: ‘Continuing operations $ 38 = § 195 § 232 Discontinued operations 00s 05 Net income 338 $2887 Per common share-diluted: Continuing operations $37 $193 $2.29 Discontinued operations 0.05 04 Net income S$ 37% $ 198 § 283 | Dividends declared per common share $1625 $ 150 $ 1.00 i Weighted-average shares outstanding-basic 1,126.6 1,188.3 1,234.0 | Weighted-average shares outstanding-diluted 1,146.0 1,211.8 1,251.7 ‘Source: SBC 10-K, February 2, 2009, {REfocMCD is tess than 6 percent fr both short- and long-em det, an increase in MCs boro ‘8 should not be cause for concer, Sociay Mcp Responsibility ‘ws its Plan to Win strategy, composed ofthe 5 P's (people, products, place, price, and pro- lay at #8 fundamental to its business success and to becoming better rather than just bigger. This st Mt delivering exceptional customer experiences by undertaking several initiatives focused “seh ofthe Five P's grounded ina st ofthe coxporate values shown in Exhibit 7. ————————— | JyERVIEW OF STRATEGIC MANAGEMENT | Current Liabilities ‘Accounts Payable ‘ShoniCurrent Long Testa Debt 31,800 364,500 ‘other Current Liabilities = = 251,400 ‘Total Current Liabilities 2.537.900 4,498,500 3,008,100 \ ‘Long Term Debt 10,186,000 7,310,000 8,416,500 | Otter Liabilities 1,410,100 1,342,500 1074900 \ Deere Long, Term Liability CABS 944,900 960,900 1,066,000 ‘Minority Interest = = — \ ‘Negative Goodwill = = = ‘Total Liabilities 75,078,900 74,111,900 13,505,500 \ Stockholders’ Equity \ | mise. Stocks Options Warrants = = - \ Redeemable Preferred Stock - - - Preferred Stock - = a ‘Common Stock 16,600 16,600 16,600 Retained Earnings 28,953,900 26,461,500 5,845,600 ‘Treasury Stock (20,289,400) (as762400) (135% Capital Surplus 4,600,200 4,226,100 3.4454 (096: Other ‘stockholders’ Equity 101,300 1,337,400 ‘Total Stockholders’ ‘Equity 3,382,600 75,279,800 7558.30, $28,461,500 ‘$29,391,700 29,0038, total Liabilities and SE Sources finance yao. EXHIBIT 7 McDonald's Corporation's Values ‘We place the customer experience at the core ofall we do ‘Our customers are the reason for our existence, We demonstrate our appreciation by providing them with high quality food and superior service, in clean, welcoming environment, at a ‘great value, ‘We are committed to our people We provide opportunity, nurture talent, develop leaders and reward achievement. We believe that a team of well-trained individuals with diverse backgrounds and experiences, working {ogether in an environment that fosters respect and drives high levels of engagement, is ‘essential to our continued success. ‘We believe in the MeDonald’s system ‘McDonald’ business model, depicted by the “three-legged stool” of owner/operator, suppliers, and company employees, is our foundation, and the balance of interests among the three groups iskey. ‘We operate our business ethically ‘Sound ethics is good business. At McDonald's, we hold ourselves and conduct our business to high standards of fairness, honesty, and integrity. We are individually accountable and collectively responsible. We give back to our communities ‘We take seriously the responsibilities that come with being a leader. We help our customers build ‘etter communities, support Ronald McDonald House Charities, and leverage our size, scope and resources to help make the world a better place. ‘We grow our business profitably ‘MeDonald’sis a publicly traded company. As such, we work to provide sustained profitable ¢growth for our shareholders. This requires a continuing focus on our eustomers and the health of our system, ‘We strive continually to improve We are a leaming organization that aims to anticipate and respond to changing customer, ‘employee and system needs through constant evolution and innovation. Source: bap: cemedonals com, [MED has made significant changes to become a socially and environmentally friendly company. 1thas been recognized for its efforts in inclusive excellence with respect to employing and creating ‘pportunities for minorities. MCD has been sted among the “top 40 companies” by Black Enterprise Magazine fr 2005 though 2007, I established its first Global Environmental Commitment in 1989. Since then it hus been actively secking to reduce its carbon fooxprint by using recycled packaging. Additionally, Ronald McDonald's Foundations raise millions of dollars each yeat for children-cen- ‘sted causes in the community. so, AGtrdng to Skinner, MCD's CHO, “Corporate responsibility means many things to many po- ne. At McDonald's, baing a responsible company means living or valves to enable ust seve food ‘faPonsbly, and work toward a sustainable future” (MCD either does not have a writen mission vent nor vision statement or these documents are not publicly available because Teould not ofthese athe time this ease was writen.) Competitors The fod service ‘toialisation ot withers, ds In, lion in Hole, industry, also known asthe restaurant industry, is lange and lucrative with « market ‘$104 billion and a price-to-earings (P/B) ratio of 80.2. Yet iis highly fragmented 000 resturants ranging from smal local eateries to global giants like MCD and Yur! MCD towers over its direct competitors inthe industry with a market cap of $59.8 2009. Yum! Brands, which has market cap of only $16.3 billion, and Burger King “Whose market cap is $2.46 billion, are second and third, respectively. Even though May 88, Ine, THE COHESION CASE ga PART + OVERVIEW OF STRATEGIC MANAGEMENT Wendy's directly competes with MCD ini sndusiry, Wendy's is currently owned BY private ey company, the Wendy SARby'sGraP A ae Mary of compli nancial BhBNS © provided in Exhibit 8 purger King (BKC) peaejed in Miami, Florida, i 1954 under eT tpt BurgerKing” by James MeLamor® an Foun jgenon, Burger King Corporation (BEC) ra ny of Burger King Holdings, 1 David frnnchses about 11,500 restaurant ne Ses and 70 forign ecunsis incu a auroe, the Middle ast Aft the Asis Tape and Latin Americ. Even though 1° canetered the second argest base chsi fn +e ic ranks third in sie inthe food sor Sadostry. With a roarket capitaliza ort ayenues of $2.55 bilion and #1008 fall: indi sloyees, BC tras behind MeDonale neal categories inthe fast-food indusiyy tiaing operating margins, camings et Shae (EPS), and PP ratio mt ts famous “Whopper sendwich DA wire a variety of burgers, chicken sands swighes, breakfast items, and salads th compe iieely with MCD. BKC, since the T9806, BY oetanding cont with de Amy and AE Tauaange Service. As such, every major mY long ree Location worldwide has a Burger Kine restaurant on its premises ‘Yum! Brands (YUM) Pn rae foment Known a8 TRICON Clee estavrants, Inc, was founded in 1997 Yr Brame o Yo! Brands, ne #2002 Yi porates over 36,000 restaueants it 110 and chan nos prminetfestura chai: 18 rerscky Fried Chicken (KFC), Pitz covitgco Bell, Long, Jn Silver's and AEN, ¥ suguarered in Louisville, Kentucky it Ns & Hut ec of 813.56 billion, bas 50,400 emp yr S May 7, 2009, and is the closest mati fain size to MeDonli’s, Headquartered 9 2s le, Kentucky, Yur is considered the compe gest in the global fast-food servic ime Syering more than one brand at 8 single second fms pelped Yun! increas wae a a SNES ort estate location. Each of is flagship seca ao dominates the segment, For exams 148 reat nods 60M of the Mexican fastfood ramon, KFC ods respectable 45% of the ce Phicken business, and Pizza Hut Teads (be poe th 15% maskes sare ia he pling De egment In adiion t0 seeKiMB mth acqusiton of romieny Han, za Be eemructuring in 2006, Yom! has Pere aiaung aggressive expaNsOn Overs H) ing ave ate of 700 neocons 6 OF Durst yar nce 1988 n hina alone 1 Ns 2S han 2,600 restaants, accous= ing for 15% ofits revenues. Exnipir 8 MeDonald’s versus Rivals, Year-end 2008 {B = Sbillion; M = Smillion) (Fast) Food, Specialty service Eateries eo YUM BKC __Industry sBux _ Industry MakaGap OLITB 1557B 2455 Tom 101B 1648 Employees 400,000 50400 41,000 $700 176,000 2,140 Revenue pogeB 1108 255B 403.14 oop = 131B Cease Margin 37.09% 24.5396 33.1356 15i% 54.24% 32.2% Nerincome 435 928M_— 192M NA ssM NIA EPS: 3327 (1941402 0.09 oig 0.12 PE jass 1765 130k ITA 114.79 2233 ‘MeD = MeDonals Corporation BKC. = BurgerKing Holdings, Ie “Yon = Youn! Brands, Ie SSBUX = Stabacks ‘Source: Based on tina. y8h00 2% Wendy/s (WEN) Founded in 1969, based in Dublin, Ohio, and operating over 6,600 restaurants, Wendy's International, Ine, owns 1,400 ofthe 6,600 restaurants. With 44,000 employees in 2007, Wendy's ranks fourth in the industry, behind MeDonald's, Yum, and Burger King. The company is well knowin for its unique squace single, double, or triple made-to-order burgers and fries, and alterna- tive menu items, such as baked potato, chil, and salads. Its new low-priced menus dzecly com- pete for market share with MCD. It holds a unique position inthe industry as an old-fashioned eating place in the fast-food business and was recognized in 1986 as the most favorite quality brand by OSR Magazine forthe second year in a row and earned first place for customer satisfac- tion in the “limited service restaurants” category in that year’s American Customer Satisfaction Index survey, With revenues of $2,450 million in 2007, Wendy's currently operates as a subsidiary ‘of the Wendy's/Acby's Group, a private company. Starbucks Corporation (SB) Even though Starbucks is no direct competition for MCD's core business, MCD is now in the fighting ring with Starbucks for the specialty coffee niche. Therefore itis importent to view Starbucks as a new direct competior. Starbucks was founded in 1985 by Howard Schultz, who recently came out of retirement to serve as chairman, CEO, and president. The company is usually grouped with the high-priced, high-margins specialty eateries industry. Starbucks’ annual rev- enues are $10,04 billion, less than half of MCD's, Starbuck's gross margins at $4.24 percent are 17 pereent points higher than McDonald's. With 176,000 employees and strong brand recognition, ‘Starbucks is seen asa leader in the specialty eateries industry. External Threats Because of its global reach and brand recognition, MCD continues to face significant threats to its aggresive growih strategy at home, one of which i the growing awareness among the medical and scientific community as well as the public ofthe direct relationship between diet and health, A joint research study recently conducted at the University of California, Berkeley, and Columbia University and published in March 2009 concluded that the presence ofa fast-food restaurant within 500 feet of a school is associated with a least a 5.2 percant increase inthe obesity rate in that school, suggesting significant health benefits of banning fast-food restaurants close to schools i€ communities are interested infighting the growing epidemic of obesity among young adolescents in America, MCD continues to encounter lawsuits brought about around the world by activists and irate par ‘nts of children less than 18 years of age. In 1990, inthe MLbel ‘ial, also known as MeDonala's Restaurants v. Morris & Steel activists from a small group known as London Greenpesce with no affiliation with the Greenpeace organization printed and distributed information under the title, “What's wrong with McDonald's?” In that printed information that was widely circulated in London, they criticized MCD’s environmental, health, and labor record. The corporation wrote to the group

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