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, 2009Introduction 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 paar5. 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 timeas 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 forpositions 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 asubstantial 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 thehealth 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 ingood 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 -0.49Assets 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. 10TOWS 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 uall 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 12Advertisements 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. 13In 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